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INTERNATIONAL SUBCONTRACTING VS DELOCALIZATION

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INTERNATIONAL SUBCONTRACTING VS  DELOCALIZATION Powered By Docstoc
					International Subcontracting
versus Delocalization?
A survey of the literature and case-studies from
the SPX network




  UNITED NATIONS INDUSTRIAL DEVELOPMENT ORGANIZATION
               economy environment employment
     INTERNATIONAL SUBCONTRACTING VERSUS
               DELOCALISATION?

                          A SURVEY OF THE LITERATURE AND
                        CASE STUDIES FROM THE SPX NETWORK




                      Jean-Louis MORCOS, UNIDO Intern
             Industrial Subcontracting and Supply Chain Management



                        under the guidance and supervision of:


  André de CROMBRUGGHE, Programme Coordinator and Deputy to the Director
              Industrial Subcontracting and Supply Chain Management
                  Investment, Promotion and Technology Branch




UNITED NATIONS
INDUSTRIAL DEVELOPMENT ORGANISATION


Vienna, Austria, 2003
This document has not been formally edited. Mention of
firm names and commercial products does not imply the
endorsement of the United Nations Industrial Development
Organization.




                                                           ii
                                     ABSTRACT:




This study aims to determine whether or not international subcontracting into developing
countries is indeed a cause for labour market changes in developed countries. It also aims to
shed some light on the activities of the United Nations Industrial Development Organisation
(UNIDO) in the context of delocalisation concerns. The study therefore analyses recent
findings on the issue of delocalisation and its labour market implications upon developed
countries in the context firstly of trade in the form of international subcontracting (or
outsourcing) and secondly in the form of foreign direct investment.

The study also uses a sample of 14 international partnerships formed through Subcontracting
and Partnership Exchanges set by UNIDO. The findings ensuing from partnerships involving
developed country contractors and developing country subcontractors have shown that
contrary to delocalisation, international subcontracting is beneficial for the South as
well as for the North. In other words, in the context of UNIDO and as echoed by a number
of academic studies, there is enough evidence to suggest that international subcontracting in
developing countries should not be seen as a primary cause for labour market changes in
developed countries. In contrast, driven by the natural competitive advantages of nations and
underpinning an international division of labour, countries at different levels of development
complement each other.




                                                                                            iii
                           ACKNOWLEDGEMENTS:




I would like to acknowledge the major contributions made by Mr. André de Crombrughhe to
this study, which made it possible to conduct it in the desired manner. His effort and support
significantly contributed to the final completion of the study and in obtaining responses from
the SPXs.

In addition, I would like to thank the managers and staff members of the following SPXs for
their responses: Costa Rica, India - New Delhi, India - Pune, Paraguay, Slovakia, Sri Lanka,
Turkey and Uruguay.

Finally, I would like to thank the following individuals for their useful comments and
cooperation for the completion of this study: Mr. Patrick Gilabert, Mr. Franck Bartels, Mr.
Janpeter Beckmann, Mr. Carlos Razo Perez, Mr. Joao Da Costa and Ms. Brigitte Roecklinger.




                                                                                            iv
                                   TABLE OF CONTENTS:




LIST OF TABLES, FIGURES, CASE STUDIES AND ABBREVIATIONS                                                 vii

I. INTRODUCTION                                                                                         1

II. SUBCONTRACTING, UNIDO AND THE MODERN CONTEXT                                                        2
     1) The concept of industrial subcontracting                                                        2
           A. Definition                                                                                2
           B. Causes for the rise of subcontracting                                                     2
           C. The importance of subcontracting                                                          3
           D. Forms of subcontracting relationships                                                     4
                1. Capacity subcontracting                                                              4
                2. Specialist subcontracting                                                            5
     2) The contribution of UNIDO to the development of subcontracting                                  5
           A. The UNIDO initiative                                                                      5
           B. Subcontracting and Partnership Exchanges (SPXs)                                           6
           C. The SPX Club                                                                              7
     3) Conclusion                                                                                      7

III. THE BENEFITS OF SUBCONTRACTING                                                                     8
     1) The benefits of subcontracting to main contractors                                              8
           A. Cost reduction                                                                            8
           B. Higher quality                                                                            9
           C. An efficient mechanism to respond to demand fluctuations                                  9
           D. Accessing regions with potential growth prospects                                         10
     2) The benefits of subcontracting to subcontractors                                                10
            A. Higher productivity and efficiency                                                       10
            B. Use of spare capacity                                                                    11
            C. Economies of scale                                                                       11
            D. Technology transfer                                                                      11
            E. Risk mitigation                                                                          12
            F. Financial support                                                                        13
     3) International Subcontracting: A win-win phenomenon for developed and developing countries       13
     4) Conclusion                                                                                      16

IV. DELOCALISATION, SUBCONTRACTING AND FDI                                                              17
    1) What is delocalisation?                                                                          17
    2) The labour effects of international trade and subcontracting                                     18
           A. Findings arguing that trade does not have a significant impact                            18
           B. Findings arguing that trade has a significant impact                                      19
           C. Summary of the labour effects of international subcontracting                             19
    3) The labour effects of FDI in the context of delocalisation                                       20
           A. The patterns of foreign direct investment                                                 20
           B. FDI into developing countries as complements and FDI into developed countries as          22
substitutes to domestic labour in industrialised countries
           C. Summary of the labour effects of FDI                                                      23
    4) The role of UNIDO in promoting complementary productive activities                               23
    5) Conclusion                                                                                       24




                                                                                                    v
V. CASE STUDIES FROM THE SPX NETWORK                                                                    25
    1) Methodology                                                                                      25
          A. Background                                                                                 25
          B. Content of the questionnaire                                                               25
          C. Selection of respondents and response rate                                                 26
          D. Comment on the questionnaire and answers                                                   27
    2) Presentation and analysis of the survey results                                                  28
          A. Costa Rica                                                                                 28
                i - The Bolsa de Subcontratación Industrial de Costa Rica                               28
                ii - Case 1: Trimpot Electronicas (USA) and Desarrollos AKA Precision                   28
                iii - Case 2: Babyliss C.R. – CONAIR – (USA) and Cia Leogar S.A.                        29
                iv - Contact details for the Bolsa de Subcontratación Industrial de Costa Rica          29
          B. India - New Delhi                                                                          29
               i - The CII-UNIDO Subcontracting and Partnership Centre (CII-SPX) of New Delhi           29
               ii - Case 3: Yiyuan Electric Light Sources Ltd (China) and Lumax Industries Ltd          30
               iii - Case 4: Fasten Group Co (China) and Anikka International PVT Ltd                   30
               iv - Contact details for the CII-UNIDO Subcontracting and Partnership Centre             30
          C. India - Pune                                                                               31
               i - The Industrial Subcontracting and Partnership Exchange (SPX) of Pune                 31
               ii - Case 5: Santana Brothers MFG PTE Ltd (Singapore) and Pune Metagraph                 31
               iii - Contact details: Industrial Subcontracting and Partnership Exchange of Pune        31
          D. Paraguay                                                                                   32
               i - The Bolsa de Subcontratación del Paraguay                                            32
               ii - Case 6: Mc. Donald’s (Paraguay) and Industrias Fatecha                              32
               iii - Case 7: Local Paraguayan supplier and large Brazilian company                      32
               iv - Contact details for the Bolsa de Subcontratación del Paraguay                       33
          E. Slovakia                                                                                   33
               i - The Subcontracting and Partnership Exchange of Slovakia                              33
               ii - Case 8: Ingersoll-Rand Group (USA) and Topoz, Team Industries and BMZ               33
               iii - Case 9: Pomagalski (France) and network of Slovakian subcontractors                34
               iv - Contact details for the Subcontracting and Partnership Exchange of Slovakia         35
          F. Sri Lanka                                                                                  35
               i - The Subcontracting and Partnership Exchange of Sri Lanka                             35
               ii - Case 10: FDN Trade BV (the Netherlands) and Sanford PVT Ltd                         36
               iii - Case 11: Xedam-Design (Germany) and Kandyan Artcraft PVT Ltd                       36
               iv - Contact details for the Subcontracting and Partnership Exchange of Sri Lanka        37
          G. Turkey                                                                                     37
               i - The Turkish Subcontracting Exchange, Turk Yan Sanayi Borsasi                         37
               ii - Case 12: Deltron Emcon Ltd (UK) and Arslan Makina                                   37
               iii - Case 13: AS-KA GmbH (Germany) and Ozkar Otomotiv Parcalari Sanayi A.S.             38
               iv - Contact details for the Turkish Subcontracting and Partnership Exchange             38
          H. Uruguay                                                                                    38
              i - The Bolsa de Subcontratación del Uruguay                                              38
              ii - Case 14: Cementos Avellaneda S.A. (Argentina) and Imzama S.A.                        39
              iii - Contact details for the Bolsa de Subcontratación del Uruguay                        39
    3) Summary of results                                                                               40
          A. Partnerships with contractors from developed countries                                     40
          B. Partnerships with contractors from developing countries                                    42

VI. CONCLUSION                                                                                          45

BIBLIOGRAPHY                                                                                            48
APPENDIX                                                                                                50




                                                                                                   vi
          LIST OF TABLES, FIGURES, CASE STUDIES AND
                      ABBREVIATIONS:




Table 1: Industrial Subcontracting in the EU-15 in 2001 (output, companies and employees).   4
Table 2: Summary of Responses.                                                               27
Table 3: Summary of Findings for Partnerships Involving a Developed-Country Main             41
Contractor.
Table 4: Summary of Findings for Partnerships Involving a Developing-Country Main            43
Contractor.


Figure 1: Reasons for Dutch Companies Producing/Outsourcing Abroad.                          8
Figure 2: A Summary of the Benefits for Subcontractors and Contractors Resulting from        14
Subcontracting Partnerships
Figure 3: Foreign Direct Investment Inflows (in percentage value of world FDI Inflows) in    20
Developed and Developing Countries Between 1980 and 2001.
Figure 4: Foreign Direct Investment Inflows (in US$ million) in Developed and Developing     21
Countries Between 1980 and 2001.


Case Study 1: The Production Process of a Particular American Car Producer                   3
Case Study 2: Some Figures on Subcontracting in Europe                                       4
Case study 3: Costs of Subcontracting Abroad                                                 9
Case Study 4: The Benefits of Subcontracting in the Case of Indonesia                        10
Case Study 5: Technology Transfers Through Subcontracting in the Czech Republic              12
Case Study 6: The Internet and New Supply Chain Solutions                                    15


EU            -    European Union
FDI           -    Foreign Direct Investment
GNP           -    Gross National Product
ISIC          -    International Standard Industrial Classification
OECD          -    Organisation for Economic Cooperation and Development
OEM           -    Original Equipment Manufacturer
R&D           -    Research and Development
RFE           -    Request For Estimate
SME           -    Small and Medium Enterprise
SPX           -    Subcontracting and Partnership Exchange
UNCTAD        -    United Nations Conference on Trade And Development
UK            -    United Kingdom
UNIDO         -    United Nations Industrial Development Organisation
US            -    United States
USA           -    United States of America




                                                                                             vii
I. INTRODUCTION:
Over the past 50 to 60 years, the world has seen major changes in the composition of its
production processes. Falling transportation and communication costs, coupled with rapid
technological changes, intensified competition and economic liberalisation have facilitated the
process of global economic integration. This has in turn enhanced international trade flows,
and especially trade of intermediate products through international subcontracting. Industrial
subcontracting represents an essential component within industrial and commercial policies
and acts as a strategy synonymous to competitive advantages. Its practice has spread to all
regions of the world. For example, in 2001 subcontracting in the EU-15 was valued at
639,354 million Euros.

In this context, with the objective of enhancing, supporting and promoting small and medium-
sized enterprises, mainly in developing countries, the United Nations Industrial Development
Organisation’ (UNIDO) Industrial Subcontracting and Supply Chain Management Programme
has been establishing Subcontracting and Partnership Exchanges (SPXs) on a worldwide basis
since 1982. These exchanges constitute meeting points between supply and demand of
industrial subcontracting activities. When run according to certain guidelines, they have
proved to be beneficial to all participants. The core of this UNIDO initiative is to promote
specialist-based subcontracting partnerships. In fact, this initiative builds upon the concept of
complementary-based subcontracting partnerships where the activities of subcontractors from
developing countries and those of main contractors from developed countries complement
each other. In these types of partnerships, not only do both entities benefit from the
partnerships but so do their respective nations.

Nevertheless, some concerns have been expressed about the implications of subcontracting
stemming from developed countries and targeted at developing countries. This concern falls
under the heading of delocalisation: an economic phenomenon, which refers to an
international transfer of productive activities from one country to another, as a result mainly
of international cost differences. Delocalisation is at the heart of employment concerns in
developed countries

The main purpose of this paper is twofold. Firstly, we aim to determine whether or not
international subcontracting into developing countries is indeed a cause for labour market
changes in developed countries. Secondly, we also aim to shed some light on the activities of
UNIDO in the context of delocalisation concerns.

For this matter, the paper will be divided into five chapters. The first section will briefly
introduce the concept of international subcontracting, describe its evolution and offer a
summary of UNIDO’s activities in this area. The second chapter will present the advantages
that international subcontracting partnerships entail. The following chapter will explain the
problem of delocalisation and notably review the importance of foreign direct investments in
order to obtain a full picture of delocalisation. The fourth chapter will present the results of a
survey based on some 14 international partnerships formed through SPXs set-up by UNIDO.
The main objective is twofold: 1) To demonstrate the “win-win” nature of the partnerships for
subcontractors from developing countries and contractors from developed countries; 2) To
show how the North and the South both benefit from subcontracting partnerships involving
one enterprise from each region. The final chapter will derive the conclusions of the study.




                                                                                                1
II. SUBCONTRACTING, UNIDO AND THE MODERN
    CONTEXT:
        1) The concept of industrial subcontracting:

                A. Definition:

The role played by industrial subcontracting has become increasingly more important over the
past few decades. Indeed, industrial subcontracting acts a very efficient mechanism to
organize industrial production through the establishment of a co-operative agreement between
various complementary units of production, namely between a main contractor and various
suppliers or subcontractors.

In this type of agreement, the main contractor entrusts one or several enterprises with the
production of parts, components, sub-assemblies or the provision of additional industrial
services that are necessary for the completion of the main contractor’s final product.
Consequently, the subcontractors undertake the designated activity following the
requirements of the main contractor, which in turn enables them to achieve higher levels of
specialization in designated fields and sectors.

For our purposes subcontracting can be defined in the following manner:

        An economic relationship where one entity, the main contractor, requests
        another independent entity, the subcontractor or supplier, to undertake
        the production or carry out the processing of a material, component,
        part, subassembly or the provision of an industrial service in accordance
        with the main contractor’s specifications.

                 B. Causes for the rise of subcontracting:

For the past 30 years, industrial subcontracting markets have grown at a greater rate than the
industrial sector taken in its entirety. There are many reasons that explain why this has
happened. Firstly, over the 1960s and 1970s, the main medium of competition was that of
price where companies simply sought to reach economies of scale and thereby to manage
growth and acquire greater market shares. In such a system, quantity prevails over quality and
therefore there is no strategic need to subcontract parts, components, or sub-assemble to meet
specific product characteristics. In contrast, a better strategic policy is for the production
process to be completely integrated (Cabinet Verley, Press Kit MIDEST 2002, page 24).

On the other hand, from the 1980s onwards, competition was not only based upon prices but
also and more importantly upon quality or product characteristics. In other words, in such a
system, innovation plays a crucial role for the product to be differentiated from the rest of the
market. In turn, companies focus on upstream activities such as R&D, marketing and product
design as well as on downstream ones such as sales and promotion. Progressively, the
importance attached to the latter tasks causes the focus to be switched away from the means
of production resulting in them being assigned to specialist partners in the supply chain
(Cabinet Verley, Press Kit MIDEST 2002, page 24).

Secondly, an additional factor that has caused subcontracting to flourish is the development
and widespread use of highly productive and flexible production techniques and methods
based upon robotics and integrated production technologies. Subcontractors are usually in a
better position to take advantage of such methods. Indeed, by combining a large number of
orders from different clients, they are able to maximize the capacity use of their equipment



                                                                                               2
and hence to offer a better price for their services (Cabinet Verley, Press Kit MIDEST 2002,
page 24).

Finally, increased levels of competition and the development of new techniques of production
have led to a high level of sophistication in the design of products. To manufacture a product
that features all the adequate materials and principles in an efficient and profitable manner, it
is necessary to call in partners with specific expertise in designated fields (Cabinet Verley,
Press Kit MIDEST 2002, page 25).

                C. The importance of subcontracting:

Today,      subcontracting   is    omnipotent.
Grossman and Helpman (2002, page 1) refer           Case Study 1: The Production Process
to an example (see case study 1) quoted in the      of a Particular American Car Producer
                                                    “Thirty percent of the car’s value goes to
1998 World Trade Organization annual report
                                                    Korea for assembly, 17.5 percent to Japan
illustrating the importance of subcontracting
                                                    for components and advanced technology,
or outsourcing by showing that only 37              7.5 percent to Germany for design, 4
percent of the production value of a particular     percent to Taiwan and Singapore for
“American” car is generated in the US.              minor parts, 2.5 percent to the United
                                                    Kingdom for advertising and marketing
Similarly, subcontracting is equally important      services, and 1.5 percent for Ireland and
in the US duopolistic industry for mid-sized        Barbados for data processing. This means
and large-sized aircrafts involving Airbus and      that only 37 percent of the production
Boeing. Boeing outsources the production of         value … is generated in the United
over 34,000 components from different               States.”
manufacturers to be assembled into its 747          Source: Grossman and Helpman, 2002,
passenger aircrafts (Shy and Stenbacka, 2003,       page 1.
page 2).

In fact, it is estimated that industrial subcontracting in the United States in 2001 generated
about 300 billion US$ in turnovers, with about 1,6 million enterprises subcontracting some of
their activities. About 146,000 enterprises were registered as industrial subcontractors and
suppliers. In fact, more than 30 percent of large enterprises were recorded as outsourcing
more than 50 percent of their production through subcontracting orders (Schicchi, 2002, slide
9).

Nevertheless, subcontracting in the US was not always as extensive as it is today. At the
outset, it was mostly an activity associated with Japanese companies. For example, up to the
late 1980s, Japanese car producers applied subcontracting to a much higher extent than
American car producers. Toyota produced roughly 70 cars per employee whereas GM’s
output was roughly 10 cars per employee. The main reason for this marked difference
according to Shy and Stenbacka (2003, page 2) is found in the fact that Toyota outsourced
almost all of the components it needed to assemble its cars.

Furthermore, in East Asia as a whole, in 1996, parts and components represented 20 percent
of total exports of manufacturing products. It also represented at the time the fastest growing
share of exports with a growth rate of 15 percent per year and correspondingly also accounted
for an increasing share of industrial imports (Ng and Yeats, 1999, cover page).

European-based companies have also followed the same trend of taking advantage of the
efficient and complementary production processes that subcontracting offers (see case study
2). According to figures from Daniel Coué (RIOST-CENAST, 2002, pages 8-9), shown in
table 1, the subcontracting market of the EU-15 in 2001 was evaluated at 639,354 million
Euros with approximately 750,471 companies registered and 5,566,665 employees engaged in
subcontracting activity.


                                                                                                 3
 Case Study 2: Some Figures on Subcontracting in Europe
 Based on a survey of 162 interviewed European companies, almost 50 percent of the companies
 were found to outsource all or a substantial part of their information (IT) functions. (Shy and
 Stenbacka, 2003, page 2). Furthermore, the Confederation of Finnish Industry and Employers
 has estimated that in 1996 subcontracting constituted up to approximately 50 percent of the
 sales of Finnish manufacturing firms (excluding those operating in the energy industries).
 Moreover, the magnitude of the outsourcing activities was estimated to have increased by 30
 percent during the 1993-1996 period. It has also been estimated that Nokia alone makes use of
 more than 300 domestic Finnish subcontractors in addition to an almost equally high number of
 foreign subcontractors.
 Source: Shy and Stenbacka, 2003, page 2.

The individual rankings of the countries forming the EU-15 show that Germany, France, Italy,
the United Kingdom and Spain account for 82 percent of the value of industrial
subcontracting (with Germany alone accounting for 30 percent of the total value), 77 percent
of the number of companies and 81 percent of the number of employees.

Table 1: Industrial Subcontracting in the EU-15 in 2001 (output, companies and employees).
    Country           Output Value of Industrial        Number of        Employees Engaged
                       Subcontracting in 2001           Companies         in Subcontracting
                           (Euro millions)                                     Activity
Germany                                191,454.59            118,138                1,349,854
France                                 114,144.22            100,825                   930,916
Italy                                   94,508.55            162,155                   849,885
United Kingdom                          79,342.52            102,111                   774,102
Spain                                   46,137.56             99,019                   618,097
The Netherlands                         20,110.48             19,249                   151,292
Belgium                                 18,731.19             22,331                   132,002
Sweden                                  17,660.06             23,733                   151,217
Austria                                 15,949.98             10,878                   127,372
Portugal                                10,387.85             36,966                   175,895
Finland                                 10,135.20              9,853                    73,974
Denmark                                  9,773.91             11,363                    85,085
Ireland                                  5,280.21             12,218                    60,244
Greece                                   4,611.34             20,847                    78,319
Luxembourg                               1,126.69                785                     8,411
EU Total - 15                          639,354.35            750,471                5,566,665
Source: Daniel Coué (RIOST-CENAST, 2002, page 9).

                D. Forms of subcontracting relationships:

The growth of industrial subcontracting has lead to the development of two main types of
subcontracting relationships, one based on capacity and one based on specialisation.

                         1. Capacity subcontracting:

The first type of subcontracting relationship is that of capacity subcontracting. In such a
situation, the main reason causing the subcontracting relationship to take place is the fact that
the main contractor does not have enough capacity to undertake the fabrication of the specific
component, part or material (Cuny and de Crombrugghe, 2000, page 16).




                                                                                               4
In other words, the main contractor has reached a capacity limit in its production process and
in order to meet market demand for its product is required to refer to a subcontracting
specialist at least for a temporary period of time. This usually represents a complementary
horizontal disintegration of production (Taymaz and Kilicaslan, 2002, pages 2-3).

                        2. Specialist subcontracting:

Specialist subcontracting represents the second type of industrial subcontracting relationship.
In this case, the main contractor relies upon the services of a subcontractor or set of
subcontractors who has specialized equipment or machinery and skilled labour to undertake
complex and precision tasks (Cuny and de Crombrugghe, 2000, page 16).

Hence, this may involve either finished products or specialized components or supplies that
require a higher level of technical expertise, which the main contractor does not possess or
cannot meet. In such a situation, both firms have vertically related complementary assets
and/or technologies (Taymaz and Kilicaslan, 2002, page 3).

          2) The contribution of UNIDO to the development of subcontracting:

                 A. The UNIDO initiative:

As the latter sections have shown, industrial subcontracting is a very important component in
modern economics and acts as a substantial vector for economic development. Its practice has
developed and become widespread and the need arose for the establishment of a more
permanent framework that facilitates the building of industrial subcontracting relationships.

The United Nations Industrial Development Organization (UNIDO) has recognized this and
as a result in 1982 set up the Programme for the Promotion of Industrial Subcontracting and
Partnership now referred to as the Industrial Subcontracting and Supply Chain Management
Programme. At the core of the programme, UNIDO has been advocating the concept of
“industrial partnerships” which refers to long-lasting and equitable industrial subcontracting
relationships based upon the specialization and technological expertise of subcontractors or
suppliers. The complementarity of the assets and technologies between the parties involved
can thus form the basis for the establishment of vertical type relationships with a long-term
sharing of responsibilities.

Within this context, UNIDO launched the programme to help developing countries as well as
economies in transition generate the benefits entailed by industrial subcontracting agreements
between small and large industries. The continuous aim of the programme is to enable small
and medium sized enterprises (SMEs) in these countries to reach the following objectives:

      §    Increase production and employment levels
      §    Improve productivity and international competitiveness
      §    Encourage import substitution and promote the exportation of products
      §    Upgrade manufacturing processes and products
      §    Contribute to the international redeployment of manufacturing facilities and the
           transfer of industrial technology and know-how to SMEs in developing countries
           and economies in transition

UNIDO has therefore conceptualised a specific methodology to help meet these objectives
and ensure that minimum conditions exist in countries to sustain viable subcontracting
arrangements. This involves the setting-up of a Subcontracting and Partnership Exchange
(SPX) in designated nations.




                                                                                             5
                 B. Subcontracting and Partnership Exchanges (SPXs):

Subcontracting and Partnership Exchanges (SPXs) are technical information, promotion and
match making centres for industrial subcontracting and partnership between main contractors,
suppliers and subcontractors, aiming at the optimal utilization (the most complete, rational
and productive) of the manufacturing capacities of the affiliated industries. In effect, the
Exchanges appear not only as the meeting points and the instruments of regulation between
the supply and demand of industrial subcontracting orders, but also as instruments of
assistance to both partners, and particularly the small and medium supplier or subcontracting
enterprise.

UNIDO provides technical assistance to developing countries for establishing and operating
Subcontracting and Partnership Exchanges (SPXs). To this end, it assists in setting up a
comprehensive roster of subcontractors, suppliers and main-contractors through a
computerized database with detailed information for rapid retrieval on:

     §   Manufacturing capacities and capabilities
     §   Equipment with technical specifications and technical characteristics
     §   Quality of production
     §   Spare capacities available for subcontracting works
     §   Types of products and services offered by the subcontractor

SPXs undertake:

    o    The identification of subcontracting, supply and partnership inquiries or offers from
         large foreign or domestic buyers and main-contractors and their dissemination to
         potential subcontractors/suppliers/partners.
    o    Assistance to potential subcontractors/suppliers/partners in organizing production
         clusters and associations and in negotiating agreements with main contractors, which
         could be their own Governments.

In addition, as recommended by two UNIDO Expert Group Meetings on "Industrial
Subcontracting and Partnership Exchanges and Policies", the new generation of SPXs act as
centres of multidisciplinary assistance and information for subcontractors and suppliers, in
fields such as:

    q    Technical support (product design, technology, equipment, innovation)
    q    Quality management, standards and certification
    q    Marketing strategies and analysis (including participation in international fairs and
         business promotion forums)
    q    Access to credit, financial facilities and incentives
    q    Management (rehabilitation, financial management, stock control)
    q    Legal advise (legal contracts, codes of conduct, reconciliation or settlement of
         disputes)
    q    Human resource management (training)

This assistance and information is provided either directly by the SPX in the form of surveys,
advice, training, awareness seminars and industrial fairs, or by referring the enterprises to the
relevant specialized institutions.

Furthermore, most SPXs organise “Supply Upgrading Programmes” to provide assistance to
clusters of small-scale suppliers and subcontractors in order to upgrade their technical and
commercial skills and their ability to meet the quality requirements of their main contractors
or buyers.



                                                                                               6
                C. The SPX Club:

Using the methodology outlined above, the Industrial Subcontracting and Supply Chain
Management Programme has successfully established more than 65 Subcontracting and
Partnership Exchanges in 32 countries across South and Central America, Europe, Africa, the
Middle East and Asia in the last 20 years, out of which 55 are still operating. In addition,
more than 100 associate members from 46 nations second this whole network of linkages that
has been set up between subcontractors/suppliers and contractors.

In other words, the range of subcontractors and suppliers and their geographical dispersion
across the globe enables the SPX Club to have a very effective mechanism for large
enterprises to network and find appropriate matches within specific countries. As a result,
participating SMEs have access to the global market and global production systems or supply
chains, thus they can promote their industrial products and services in national and
international markets as well as identify and meet the needs of domestic and overseas partners
(de Crombrugghe, Bhushan and Roman; 2001; pages 1-2).

        3) Conclusion:

Industrial subcontracting has grown substantially across the world over the past two decades
and UNIDO has been very active in promoting specialist-based subcontracting partnerships
through the establishment of Subcontracting and Partnership Exchanges. Subcontracting
partnerships are indeed very beneficial for the parties involved and our aim in the following
chapter is to outline the benefits that they generate for subcontractors and main contractors
and explain how these partnerships are a win-win situation.




                                                                                            7
III. THE BENEFITS OF SUBCONTRACTING:
          1) The benefits of subcontracting to main contractors:

                     A. Cost reduction:

There are a number of reasons motivating companies to subcontract as part of a new mixture
of overlapping strategic priorities. First of all, companies are driven to subcontract to take
advantage of national, regional or international differences in factor costs, notably low wages
or materials. For industrialised countries, production or purchasing abroad is in many
countries cheaper than domestic production or domestic buying. Ultimately, this enables
companies to reduce the cost of the final product and thereby to offer competitive prices.

For instance, according to a study undertaken by Van Eenennaam (1995), cost advantages
were the first and by far most important reason for Dutch companies using international
production facilities (see figure 1). Other reasons included: higher flexibility, risk reduction,
environmental policies, raising quality or entry into new technology.

Figure 1: Reasons for Dutch Companies Producing/Outsourcing Abroad.

    90%


    80%


    70%


    60%


    50%


    40%


    30%


    20%


    10%


    0%
          Cost Advantages   Higher Flexibility   Risk Reduction      Environmental   Raising Quality   Outsourcing Non-   Entry to New
                                                 (Diversification)     Policies                         Core Activities   Technology


Source: Adapted from Verra, 1999, page 4.

There are a number of reasons that explain why placing orders with subcontractors helps
reduce costs (de Crombrugghe and Garrigós-Soliva, 1997, pages 41-42):
    · Subcontractors have more flexibility as management can take decisions more rapidly
        whilst production programmes may be changed or adjusted more easily
    · Highly specialized subcontractors are more efficient in their production processes and
        undertake these processes in a cheaper manner than contractors
    · Subcontractors usually conduct little research, marketing and development activities
        which reduces their costs
    · Low overhead and administrative costs
    · Subcontractors usually have less equipment and machinery as well as simpler
        workshops than large firms




                                                                                                                                         8
However, the advantages must be
                                            Case study 3: Costs of Subcontracting Abroad
weighed against the disadvantages of
                                            A study by Murphy and Daley (1994) suggests that
producing/subcontracting abroad and         75 percent of the respondents in their study spent at
these     disadvantages     are    often    least 25 percent of their purchasing budget on
underestimated (see case study 3).          transportation. Added to that, they found that due to
There are indeed extra costs and time       the distribution problems, it is necessary to
factors involved. There are high costs      maintain an inventory buffer adding another 5 to 10
of      international    travel     and     percent to unit cost. Finally, Murphy and Daley
communication as well as broker and         also found that the time needed to deliver products
agent’s fees and finally costs of           from abroad is typically five to ten times longer
distribution which add another 10 to 15     when compared with domestic delivery.
percent to a product’s unit cost (Verra,    Source: Verra, 1999, page 3.
1999, page 3).

                B. Higher quality:

Secondly, the search for higher quality products with high reliability in a growingly
sophisticated environment pushes companies to subcontract. Very often, in-house specialists
may not match and may not meet the required criteria and as a result companies refer to the
specialist skills and higher degrees of competencies available through outside suppliers or
subcontractors.

These are more efficient and more effective and can provide the part, component, assembly or
sub-assembly with a higher level of accuracy and precision. The alternative of having to train
and upgrade the skills and abilities of the labour force or to acquire the relevant machinery
and equipment requires both time and large financial deployments. In this sense,
subcontracting represents an excellent process to complement the core activities of a company
with high quality components, parts, packaging or other elements.

In fact, some countries, regions or even clusters of industrial sites have acquired an
international reputation for manufacturing or producing high quality products, parts or
components. Hence, using subcontracting agreements enables companies to remain
competitive and sustain a competitive advantage (Verra, 1999, page 3).

                C. An efficient mechanism to respond to demand fluctuations:

Thirdly, the availability of products/raw materials is an additional reason why companies
decide to source internationally. In order to meet product demands, companies can add
international suppliers to their portfolio of domestic suppliers (Verra, 1999, page 3). In other
words, using international subcontractors acts as a hedge against fluctuations in demand.

When faced with a temporary increase in demand or a seasonal upward trend, contractors
have to decide whether they wish expand their capacities through heavy investments or
alternatively subcontract the activities. The former decision however involves the risk of
under-utilization of this investment in the future. Expanding the capacities of an enterprise to
respond to demand levels induces heavy investments in machinery, equipment and plants and
some large manufacturers tend to use plant and equipment well beyond depreciation stage to
avoid having to undergo such large re-investment burdens. In contrast, entrusting a
subcontractor or supplier with the completion of parts, components, assemblies or sub-
assemblies, is a much more capital-effective way of meeting upward demand fluctuations and
avoids excess capacity (de Crombrugghe and Garrigós-Soliva, 1997, page 41).




                                                                                                9
                D. Accessing regions with potential growth prospects:

Finally, international subcontracting offers commercial opportunities by penetrating markets
with growth prospects. By subcontracting in a promising country, companies establish a link
with that particular location and penetrate new markets with growing outlets and purchasing
power such as, for example, in the automobile and electronics industries in India or China.

In addition, by increasing the local content of products sold in countries with trade barriers it
is often possible to lower the obstacles for their own products (Verra, 1999, page 3) and to
lower the breakeven point between cost-benefit and thus to decrease the sales price in this
new market.

        2) The benefits of subcontracting to subcontractors:

                A. Higher productivity and efficiency:

The benefits of subcontracting are also plentiful for subcontractors, especially those of
developing countries. Firstly, subcontracting leads to a specialization in the completion of
specific activities or specific components or parts. This type of specialization enables the
subcontractor to achieve a higher level of efficiency and skill and thereby higher levels of
capital and especially labour productivities.

In fact, according to Hondai (1992) quoted in Hayashi (2002, page 2), subcontracting
agreements enables SMEs to reduce information and transaction costs through the easy and
cheap acquisition of new technologies, product designs, production processes, management
methods, marketing and input materials from large-scale clients (see case study 4). In some
cases, this could eventually lead to an ability to conduct research and development activities
and hence to develop and innovate in the technology or process involved.

 Case Study 4: The Benefits of Subcontracting in the Case of Indonesia
 Using a sample of 61 interviews of local metalworking and machinery SMEs in the Indonesian
 automobile and motorcycle industries, Hayashi (2000) found that vertical inter-firm
 cooperation through commercial transactions was perceived as one of the most effective
 sources of technical and marketing support to SMEs. This finding coincides with the theoretical
 counterpart of the study which indicates that a positive relationship exists between
 subcontracting ties and technological and marketing capabilities of SMEs.

 Hayashi furthered his study of Indonesia based on an interview and questionnaire-based field
 survey carried out between August 1999 and March 2000 on small and medium-scale
 metalworking and machinery firms which supplied their products or processing services to
 automobile, motorcycle, agricultural machinery and bicycle producers. The study found that the
 role of subcontracting linkages in improving labour productivity of SMEs is pivotal. According
 to the estimated production functions, the subcontracting ratio is a dominant variable in
 explaining variations in labour productivity. Also, indices of total factor productivities vary in
 line with the contribution of subcontracting to total factor productivity. His findings indicate
 that subcontracting linkages are beneficial to SMEs in improving their productivity.

 In fact, the study quantitatively confirmed earlier studies that subcontracting is conducive to
 industrialisation. For instance, referring to their case studies in rattan furniture, wooden
 furniture and garment sectors, Berry and Levy (1999) explained that subcontracting agreements
 provided SMEs in Indonesia with an important opportunity to learn new technology. Harianto
 (1996) found benefits of SMEs from intensive technical linkages in subcontracting ties while
 Sato (1998) illustrated a case in which a higher-layer supplier firm in the Indonesian
 motorcycle industry fostered its subcontractors through the provision of production facilities
 and training programmes on technology and management.
 Source: Hayashi, 2002, pages 2-3.


                                                                                                 10
                 B. Use of spare capacity:

Subcontracting arrangements also enables enterprises to increase the rate of utilisation of the
installed capacity and to improve capital and labour productivity. Indeed, very often, they
have under-utilised facilities.

Finding outlets for spare industrial capacity helps increase production thereby raising output
and ultimately revenue. An additional consequence is that it generates the creation of
employment opportunities. In fact, contractors, even occasional ones, enable subcontractors to
stabilize their orders over a given period of time.

                 C. Economies of scale:

Thirdly, by concentrating on a single and specialized activity or discipline, subcontracting
service providers can gain economies of scale whilst at the same time further the cost
advantages they offer to original equipment manufacturers (OEMs). Scale economies result
from larger facilities, broader and denser networks, and even greater purchasing clout.

                 D. Technology transfer:

Fourthly, subcontracting arrangements act as very efficient mechanisms and tools for the
technological enhancement of small and medium-sized enterprises (see case study 5). By
engaging in an active collaborative agreement with specific customers, suppliers and
subcontractors benefit from a large amount of technology transfer. In our context, technology
refers to “all forms of physical assets, knowledge and human learning and capabilities that
enable the efficient organization of goods and services” (Dunning, 1993, page 287).

In order to ensure that the inputs required to complete the production of goods meet some
standard level, contractors including large multinational enterprises can provide suppliers not
just with specifications but sometimes also with assistance in raising their technological
capacities. UNCTAD’s 2001 World Investment Report indicates that “strong linkages can
promote production efficiency, productivity growth, technological and managerial capabilities
and market diversification in supplier firms”.

Moreover, technology transfer can take one of three forms. The first area of technology
transfer relates to product technology (UNCTAD, 2001, page 143) which occurs via the
following routes:

            1.   Provision of proprietary product know-how
            2.   Transfer of product designs and technical specifications
            3.   Technical consultations with suppliers to help them master new technologies
            4.   Feedback on product performance to help suppliers improve performance

The second area is that of process technology (UNCTAD, 2001, page 143). This occurs in the
following ways:

            1.   Provision of machinery and equipment to suppliers: Contractors can transfer
                 machine-embodied process technology by providing machinery/equipment to
                 local suppliers. Such equipment may be related to the manufacturing of the
                 product to be purchased or testing equipment for quality control (UNCTAD,
                 2001, page 143).
            2.   Technical support on production planning, quality management, inspection
                 and testing: This type of support includes assisting domestic suppliers in
                 improving their manufacturing processes, quality control techniques,
                 inspection and testing methods. In addition, contractors may also provide


                                                                                            11
                advice on the selection/use of process equipment/technologies (UNCTAD,
                2001, page 143).
           3.   Visits to supplier facilities to advise on layout, operations and quality:
                Foreign investors may send relevant personnel to visit the supplier’s premises
                in order to provide advice on factory layout, installing machinery, production
                planning, production problems and quality control. Moreover, this could also
                consist of sending affiliates’ engineers to the supplier’s factory for a specific
                period (UNCTAD, 2001, page 143).

Thirdly, contractors can lead to the transfer of organizational and managerial know-how
(UNCTAD, 2001, page 143). This can take several forms:

           1.   Assistance with inventory management and the use of just-in-time and other
                systems
           2.   Assistance in implementing quality assurance systems (including ISO
                certification): Some companies may provide support to their suppliers in
                designing and implementing quality assurance systems or total quality
                control techniques (UNCTAD, 2001, page 143).
           3.   Introduction to new practices such as network-management or financial,
                purchase and management methods (UNCTAD, 2001, page 143).

 Case Study 5: Technology Transfers Through Subcontracting in the Czech Republic
 Deardorff and Djankov (2000) studied the significance of subcontracting as a source of
 knowledge transfer and increased efficiency for Czech firms over the period from 1993 to 1996.
 For this matter, they were able to obtain balance sheets and profit and loss accounts for a
 sample of 373 manufacturing firms in the Prague region in the metal product, base metal,
 electric, machinery, chemical, clothing, textiles, paper and printing, food, lumber and furniture
 sectors. Moreover, the data included detailed information on output produced, firm expenditures
 and employment as well as data on sales, subsidies and inventory changes. The survey also
 included a qualitative part with information on enterprises that signed subcontracting
 agreements with foreign partners. Indeed, by the end of 1996, 201 subcontracting arrangements
 were made between local firms and foreign companies.

 To study the effects of subcontracting on employee training and the consequent increased
 efficiency for subcontractors, they analyze the relationship between subcontracting agreements
 and two enterprise parameters over the period from 1993 to 1996. Specifically, they study the
 stocks of firms that have subcontracting arrangements and try to determine whether there are
 any changes to the ratios of market value to replacement value. Secondly, they analyze the
 changes in the shares of variable costs to sales. The cost share variable is taken to be indicative
 of variable cost per unit, under the assumption that prices are constant.

 In turn, using these two parameters, if subcontracting leads to technology transfer and thereby
 increased efficiency, then enterprise performance and valuations would improve. The results of
 their analyses indicate that there is indeed a positive correlation between subcontracting and
 knowledge transfer thereby resulting in increased efficiency.
 Source: Deardorff and Djankov, 2000.

                E. Risk mitigation:

Fifthly, the most recent thinking concerning subcontracting relates to risk mitigation. It is
argued that one of the reasons for engaging in subcontracting arrangements is rooted in the
need to reduce business risks (such as inventory obsolescence, uncertainty and stock-outs
related to volume fluctuations – Chung, Jackson and Laseter; 2002; page 3) while increasing
the rate of profit through special orders and improved payment conditions (Hayashi, 2002,
page 2).



                                                                                                 12
                F. Financial support:

Finally, contractors could provide financial support or improved access to credit to their
subcontractors, for instance a contract could serve as collateral for loans. For large contractors
originating from industrialized countries such as Japan, financial assistance could take the
form of advanced payments or low-cost rental of standard factories (de Crombrugghe and
Garrigós-Soliva, 1997, page 41) and even the form of equity participation in the
suppliers’/subcontractors’ capital. Hondai also explains that subcontracting improves
creditworthiness through the use for instance of debt guarantees by parent firms (Hayashi,
2002, page 2).

        3) International Subcontracting: A win-win phenomenon for developed and
           developing countries:

Companies in industrialized nations recognize that supplier relationships represent very
efficient mechanisms for the organization of their production processes (Shy and Stenbacka,
2003, page 1). As mentioned earlier, the economic world is increasingly competitive and
globalized, and in this context, subcontracting agreements are important technically,
economically, managerially, as well as strategically if companies are to maintain and improve
their national and international competitiveness (Amesse et al, 2001, page 561).

As figure 2 shows, subcontracting part of the supply chain represents the first stage of a
virtual economic circle for main contractors. Complementary subcontracting activities enable
firms to reduce their costs, to improve the quality of their products, and to respond effectively
and rapidly to demand fluctuations. Economies of scale are made as the level of output
increases. In turn, the labour and capital productivities of the given company are enhanced as
it becomes more organizationally efficient. Companies can therefore focus on their key or
core productive activities and spend more on R&D in order to significantly differentiate the
characteristics of their products from those of their competitors. It thus gains market share and
hence achieves a higher level of national and international competitiveness. Enough revenue
is ultimately generated for the company to create new job opportunities in its home country
whilst maintaining its core productive activities and hence saving employment.

From the subcontractor’s point of view, the advantages of receiving subcontracting orders are
equally beneficial. By drawing upon its spare capacity, it generates more products and at the
same time creates a number of job opportunities. Through this, it reaps the benefits of
economies of scale as the demand for specific and precise products rises in parallel with
orders from main contractors. The subcontractor’s labour force thereby becomes more
productive. As the labour force focuses on and specializes in the completion of specific
products or processes, it becomes more efficient and acquires specific skills. Very often, these
skills are enhanced as a result of the technology and knowledge of the contractor transferred
on to the subcontractor through spillover mechanisms.

Overall, the dispersion of production processes, assets and technologies of subcontractors and
contractors are complementary and lead to increased efficiency on both sides. In effect, an
international division of labour is achieved from the competitive advantages and skills of
nations driven by market forces. In fact, Marc Chevalier argues that in the future supplier
relationships will become more vital for the success of companies than strategic alliances
have proved to be over the past few years (Chevalier, 2003, page 56). Furthermore, the
Internet offers a number of commercial opportunities and could facilitate and enhance the
establishment of subcontracting arrangements in the future (see case study 6).




                                                                                               13
 Figure 2: A Summary of the Benefits for Subcontractors and Contractors Resulting from
 Subcontracting Partnerships
                                               Improved
                      Greater                 national and             Increased            Job creation
                    market share             international              revenue
                                            competitiveness


                       Product
                   differentiation

 Benefits
                                             Enhanced labour              Greater             Economies
                        Focus on                and capital            organizational          of scale
 For               strategic and core          productivity              efficiency
                   activities (R&D)
 Contractors
                                                                   Improved quality

                         SUBCONTRACTING                                    Cost reduction
                             ORDERS
                                                                                   Response to demand
                                                                                       fluctuations

                   Use of spare capacity
 Benefits

 For
                  Job creation
 Subcontrac-
                                                               Improved labour              Greater
 tors                                                                                   product/process
                                           Economies             and capital
                  Increased output          of scale             productivity            specialization


Source: Author’s Workings.

Apart from the benefits to contractors and subcontractors arising from subcontracting
agreements, it also has a very positive impact on the general level of economic development
for both developed and developing countries.

Indeed, subcontractors are often small and medium-sized enterprises and these types of
enterprises are important for the economic development of developing countries. Berry and
Mazumdar (1991) quoted in Hayashi (2002, page 2) put forward a number of reasons why this
is so. Firstly, SMEs are important because of the number of establishments, the number of
employees and the value of output they represent in developing countries. Secondly, SMEs
contribute extensively to the favourable combination and utilization of production factors
such as capital and labour through the adoption of technologies appropriate to resource
endowments and through this participation in an inter-firm division of labour. In this way,
SMEs contribute to economic industrialization. Finally, SMEs facilitate equal income
distribution as a consequence of their larger share in labour earnings (Hayashi, 2002, page 2).

By drawing upon specialised suppliers, subcontracting can therefore enhance, accelerate and
facilitate economic development in developing countries. This process is conducted in a
variety of ways. These include:

       1.      Identification of available spare capacity in industrial sectors and optimal
               allocation of national resources: Industrial subcontracting broadens the
               industrial base and ensures the efficient and full utilization of capital and labour
               resources. In this way, it maximizes the use of spare capacity and increases the



                                                                                                           14
          total level of national industrial production (de Crombrugghe and Garrigós-
          Soliva, 1997, pages 7-8).
    2.    Employment creation and reduction in employment fluctuations (de
          Crombrugghe and Garrigós-Soliva, 1997, pages 7-8)
    3.    Flexibility of industrial production with greater possibilities of
          diversification (de Crombrugghe and Garrigós-Soliva, 1997, pages 7-8)
    4.    Access to international subcontracting routes thereby prompting regionally
          integrated industrial clusters hence boosting exports (de Crombrugghe and
          Garrigós-Soliva, 1997, pages 7-8)
    5.    Increased specialization of small and medium industries thereby improving
          productivity and efficiency: Industrial subcontracting enables SMEs to focus on
          the production of specific products or processes and hence over time to acquire a
          competitive advantage in a given range of activities as their technological and
          technical competencies improve (de Crombrugghe and Garrigós-Soliva, 1997,
          pages 7-8).
    6.    Import substitution: Industrial subcontracting increases the endogenous
          production of parts, components, sub-assemblies and assemblies that were
          previously imported and hence creates savings in foreign exchange through
          import substitution (de Crombrugghe and Garrigós-Soliva, 1997, pages 7-8).

Case Study 6: The Internet and New Supply Chain Solutions
The Internet offers great commercial opportunities for profit-making companies and enterprises
and subcontracting could also take advantage of this medium of interaction. Indeed, e-
procurement solutions may help buyers to reach a large number of potential suppliers at a very
low vendor search cost within a short period of time, thereby allowing buyers to improve
overall profitability without any negative impact on total purchasing cycle time.

Barchi Peleg (2002) conducted a research study to analyse the value of using web-based
procurement applications to attain improved cost management. For this reason, he used data
taken from the Noosh database which included more than 9,000 records of Request-for-
Estimates (RFEs) with two or more suppliers (each including a specific job description and
price quotes received from each of the contacted suppliers).

The final results indicated that buyers who submitted RFEs to five or more suppliers gained on
average 34 percent reductions in purchasing costs as opposed to those who did not submit any
RFEs. Peleg identified the following factors as contributing to the improved productivity and
cost reductions realized:
    1. Web-based applications let buyers contact a large number of suppliers for a price
         quote, with a minimal impact on time and their total overhead costs.
    2. Due to the simplicity of submitting online bids, more suppliers are expected to respond
         to a RFE.
    3. Web-based applications provide buyers with advanced tools to compare all bids and
         choose the one that best satisfies their criteria, making the selection process more
         efficient.
    4. Many web-based applications provide supporting tools to assist buyers in keeping track
         of supplier performance and manage their supplier database in the most efficient way.

Moreover, suppliers benefit as well from the use of e-procurement bidding.
   1. Being listed as an approved vendor makes suppliers more visible to their potential
       customers, who might otherwise be unaware of the services they provide.
   2. Automating parts of the process of receiving RFEs and submitting price quotes reduces
       overhead costs associated with the process and allows the suppliers to take part in more
       bids, thus increasing the expected number of orders received

However, despite these advantages, Peleg’s study did not consider the problems entailed for
subcontractors and suppliers by e-procurement and these should be considered to determine its
net effects.
Source: Peleg, 2002.
                                                                                             15
        4) Conclusion:

International subcontracting, as demonstrated by UNIDO’s growing network of SPX
members (55) and associate members (more than 100), has become an increasingly useful tool
for both subcontractors and main contractors. On the one hand, subcontractors improve their
productivity and efficiency, reduce their spare capacity, develop economies of scale and
benefit from technology transfers. Moreover, by concentrating on small and medium sized
suppliers in developing countries, it stimulates a whole process of linkages within different
industrial sectors and hence facilitates their industrial development. On the other hand, main
contractors from developed countries improve their competitiveness by reducing their
production costs; by having access to high quality components, parts, sub-assemblies or
industrial services and by penetrating markets with commercial opportunities. This increased
efficiency and the resulting spare resources then enables them to generate new employment
opportunities. Hence, not only do the contractors from developed countries and the
subcontractors from developing countries benefit but so do their respective nations.
Complementary-based subcontracting partnerships are therefore a win-win situation for the
North as well as the South.

Nevertheless, despite these market-driven advantages, some concerns have been expressed
about the implications of subcontracting stemming from developed countries and targeted at
developing countries. Falling transportation and communication costs, rapid technological
changes, the reduction in trade barriers (tariff and non-tariff related) and intensified
competition within consumer markets have forced enterprises to improve their
competitiveness by reaping the benefits of costs differences available across the world. In this
search for improved competitiveness, companies have delocalised internationally, either by
subcontracting outside their domestic markets or by moving part or the entirety of their
production processes to foreign countries. It is with the issue of delocalisation that we shall
therefore turn to in the following chapter.




                                                                                             16
IV. DELOCALISATION, SUBCONTRACTING AND FDI:
        1) What is delocalisation?

Strictly speaking, delocalisation is difficult to quantify statistically since its takes different
forms. Delocalisation refers to a geographical movement or transfer of productive activities,
as a result essentially of a more advantageous cost price. This international movement of
productive activities is either the end result of a deliberate enterprise strategy or the result of
the natural market forces of the competitiveness of nations. Delocalisation is therefore at the
heart of employment concerns in developed countries.

The deterioration of labour market conditions especially for unskilled workers in many OECD
countries during the 1980s and 1990s has been a primary catalyst for this concern.
Furthermore, firms delocalising is often allied to a concern that increasing import penetration
(including trade in intermediary inputs) particularly from low-wage (developing) countries,
has adverse labour market consequences for domestic unskilled workers in developed
countries. Indeed, one of the arguments put forward to explain the rise of unemployment in
developed countries is based either on the geographical shifting of productive activities to
developing countries, on the use of subcontracting in developing nations or on increased
imports from developing countries.

Besides, the link between this break-off of trade relations with a domestic source for the
benefit of a foreign source is very often the result of an enterprise’s decision that therefore
acts as the agent of this delocalisation effect. It is thus essential when referring to the problem
of delocalisation, to appreciate not only the importance of international subcontracting but
also the importance of foreign direct investments. Indeed, delocalisation can occur in the form
of FDI. Economists Feenstra and Hanson in fact share this same opinion (2001, page 26).

Very often the importance of foreign direct investments as a cause for the rise of
unemployment in developed countries is neglected. “Foreign direct investment constitutes the
aggregate of corporate economic activity that forms part of the financial account of a country
and is recorded in IMF balance of payment statistics. It comprises: (1) the net acquisition of
share and loan capital through mergers and takeovers, joint ventures, and the establishment of
new greenfield subsidiary companies; (2) profits of overseas subsidiaries which are reinvested
earnings and (3) parent to subsidiary capital transfers” (Bartels and Pass, 2000, page 44).
Foreign direct investment is distinguished from portfolio investment, which represents
investments in corporate stocks, shares and government stocks up to 10 percent of the capital
invested. The key difference is that FDI deals with the maintenance and creation of real
productive assets whilst portfolio investment implies the transfer of a financial asset from one
individual or institution to another (Bartels and Pass, 2000, pages 44-45).

In this chapter, in order to appreciate the importance of delocalisation in its entirety, we shall
analyse recent findings on the issue of delocalisation and its labour market implications upon
developed countries in the context firstly of trade in the form of international subcontracting
(or outsourcing) and secondly in the form of foreign direct investment.

Although we shall present some findings which encompass many OECD countries, the US
experience is perhaps the most suitable to analyse the effects of delocalisation described in
this sense for three main reasons. Firstly, US wages are generally more flexible than those in
other countries such as Japan and the EU. Secondly, the US share of consumption of
manufactured goods from developing countries is higher and has risen more rapidly over the
1980s. Finally, the US remains the world’s largest multinational investor (Lawrence, 1994,
page 6).




                                                                                                17
        2) The labour effects of international trade and subcontracting:

                A. Findings arguing that trade does not have a significant impact:

Academic studies have tried to quantify statistically the impact of international trade between
developed and developing countries on OECD labour markets including trade in intermediate
inputs or international subcontracting. The majority of them have concluded that the effect of
such trade flows is too small to account for OECD labour market changes.

For instance, a 1992 OECD study quoted in Baldwin (1995, pages 13-18) indicates that the
net employment effects of changes in exports and imports between developed and developing
countries have not been significant enough to account for OECD labour market changes.
Using a very detailed data sample of 33 industries, the study used input-output techniques
covering the 1970s and 1980s to decompose changes in output and employment by industry
in nine OECD countries; namely Australia, Canada, Denmark, France, Germany, Japan, the
Netherlands, the United Kingdom and the United States. The study finds that domestic factors
such as changes in the demand for domestic goods and increases in labour productivity were
generally much more important in accounting for labour market changes. It was also noted in
the countries and periods covered that the employment-creating effects of increased exports
usually dominated the employment-displacing effects of increased imports. However, a
second conclusion is that trade changes have produced significant adverse employment
effects in particular industries, especially labour-intensive sectors such as textiles, clothing,
timber, furniture, leather, drink, food and tobacco.

Nevertheless, it is important to note that the natural competitiveness of nations would actually
lead to this second effect. Indeed, in a global economy, nations would be driven to make full
use and to take advantage of the resources (whether these are natural or human) in which they
are relatively better endowed. In other words, developed countries would concentrate on
capital-intensive or high-skill activities while developing countries would concentrate on
labour-intensive or low-skill activities.

In addition, in 1990, 70 percent of the US’s manufacturing imports came from other OECD
countries. In contrast, manufacturing imports from developing countries, despite having
increased over the 1980s, only accounted for about 2.1 percent of US GNP (Lawrence, 1994,
page 13). Furthermore, Sachs and Shatz (1994) quoted in Lawrence (1994, page 13) find that
over the 1978-1990 period, trade with developing countries reduced US manufacturing
employment by 5.7 percent, a figure equal to only about one percent of employment overall.
Moreover, Berman, Bound and Griliches (1994) quoted in Baldwin (1995, pages 23-26) use
data on US workers in four-digit ISIC industries between 1973 and 1987. They argue that the
magnitude of outsourcing (international subcontracting) is too small to account for the
observed wage and employment changes in the US and therefore reject outsourcing as a
possible explanation. As a result, they conclude that US labour market changes in the 1980s
were primarily due to domestic factors (Lawrence, 1994, page 16).

Indeed, one main argument put forward by economists to explain labour market changes in
OECD countries suggests that developed countries produce increasingly more sophisticated
and high quality goods thereby reducing the demand for unskilled workers within their
frontiers. This is a natural market-driven economic phenomenon referred to as skill-biased
technological change that is based on the most efficient use of national resources, whether
these are natural or human. In other words, this represents a situation where technological
changes are favourable to one part of the labour force, the skilled population, but
unfavourable to the other part of the labour force, the unskilled population. In fact, many
economists researching the decline in wages of low-skilled workers during the 1980s and
1990s, both in real terms and relative to wages of skilled workers, have concluded that it is



                                                                                              18
not trade which is the dominant or even important explanation for the shift in wages, but
rather technological change.

Nevertheless, despite these findings which suggest that domestic factors rather than
international subcontracting form the roots for OECD labour market changes, one school of
thought argues for the opposite.

                B. Findings arguing that trade has a significant impact:

Among the main opponents to the view that trade in the form of international subcontracting
with developing countries is too small to account for OECD labour market changes are
Feenstra and Hanson. They argue that trade in intermediate inputs or subcontracting has the
same effect as skill-biased technological changes (Feenstra and Hanson, 2001, page 1). Their
opinion is that distinguishing between wage changes due to trade in intermediate inputs and
wage changes due to technological change is an empirical rather than a theoretical question
since both of these will shift demand away from low-skilled activities while raising relative
demand and wages of the higher skilled (Feenstra and Hanson, 2001, pages 1-2).

They define outsourcing as an economic phenomenon “which in addition to imports by US
multinationals, includes all imported intermediate or final goods that are used in the
production of, or sold under the brand name of an American firm” (Feenstra and Hanson,
1995, page 20). With this definition, Feenstra and Hanson using regression techniques try to
determine whether outsourcing can account for a significant part of the shift towards skilled
labour. For this matter, they explain changes in the share of skilled labour in the total wage
bill on the basis of various industry variables notably changes in the import share. They use a
panel of 450 four-digit ISIC industries in the US during the 1980s for their analyses.

They conclude that between 15 and 33 percent of the shift towards skilled labour within US
manufacturing industries over the 1979-85 period is explained by the rising import share
(Feenstra and Hanson, 1995, page 28). Additional work undertaken by both authors (Feenstra
and Hanson, 1996, abstract) in fact revises the figure from 15-33 percent to 31-55 percent.
Hence, they find evidence in both studies that rising imports reflecting the outsourcing of
production activities helps explain the reduction in the relative employment and wages of
unskilled workers in the US during the 1980s (Feenstra and Hanson, 1995, abstract).
Furthermore, one case that they use to defend their view is the example of US firms exporting
intermediate inputs to the Maquiladora plants in Mexico, where the assembly of inputs and
other production activities take place rather than in the USA (Raghavan, 2002, page 2).

Nevertheless, our response to these findings is as follows: the shift away from unskilled
workers and towards skilled workers in developed countries is a natural market-driven
phenomenon driven by the competitiveness of nations and the resources in which they are
better endowed.

                C. Summary of the labour effects of international subcontracting:

Most of the findings under the international subcontracting heading of delocalisation suggest
that trade with developing countries is too small to account for labour market changes in
OECD nations. Most of the studies argue that the source for these labour market changes stem
from domestic factors, the most notable one being technological changes. The main
opponents to this view are economists Feenstra and Hanson who argue that international
subcontracting has the same effect as domestic technological changes. The point put forward
by these two economists is that international subcontracting has adverse consequences for the
unskilled portion of the job market in developed countries. We have argued that in fact, this is
a natural market-driven phenomenon in the context of a global economy.



                                                                                             19
However, international subcontracting only covers one component of delocalisation. As we
mentioned earlier, in order to obtain a full view of delocalisation, one should also bear in
mind the importance of foreign direct investments and their ramifications upon labour
markets within OECD nations.

                                             3) The labour effects of FDI in the context of delocalisation:

                                                           A. The patterns of foreign direct investment:

As Gaston and Nelson (2002) point out, the greater portion of FDI inflows is directed towards
industrialized countries. This pattern has been more or less stable since the end of the Second
World War up to this day. According to FDI figures compiled using UNIDO methodology
(see figure 3), over the period between 1980 and 2001, developed countries received an
annual average (over the period) of 76 percent of all FDI inflows with developing countries
receiving an annual average of 24 percent.

Figure 3: Foreign Direct Investment Inflows (in percentage value of world FDI Inflows) in
Developed and Developing Countries Between 1980 and 2001.
                                                                                                                   Industrialised Countries                  Developing Countries
                                       100


                                       90


                                       80                                                                                                                                                               76.04
 Shares of Foreign Direct Investment




                                       70


                                       60


                                       50


                                       40


                                       30
                                                                                                                                                                                                         23.95

                                       20


                                       10


                                        0
                                             1980

                                                    1981

                                                           1982

                                                                  1983

                                                                         1984

                                                                                1985

                                                                                       1986

                                                                                              1987

                                                                                                     1988

                                                                                                            1989

                                                                                                                   1990

                                                                                                                          1991

                                                                                                                                 1992

                                                                                                                                        1993

                                                                                                                                               1994

                                                                                                                                                      1995

                                                                                                                                                              1996

                                                                                                                                                                     1997

                                                                                                                                                                            1998

                                                                                                                                                                                   1999

                                                                                                                                                                                          2000

                                                                                                                                                                                                 2001

                                                                                                                                                                                                         Average




Source: UNIDO Statistics compiled from the International Finance Statistics (from International
Monetary Fund) according to UNIDO List of Countries and areas in selected groupings in the
International Yearbook of Industrial Statistics 2002.

In monetary terms, in 1980 developing countries received US$ 5,718.27 million worth of FDI
inflows in contrast to US$ 46,478.87 million for developed countries. In 1990, the figures
were respectively US$ 29,954.01 million and US$ 172,239.47 million. By 2000, the levels
were US$ 204,713.91 million for developing nations and US$ 1,2 billion for developed
countries. Indeed, as figure 4 shows, increases in levels of inward foreign direct investment
flows were much higher in the case of developed countries than in the case of developing
countries.




                                                                                                                                                                                                              20
Figure 4: Foreign Direct Investment Inflows (in million US$) in Developed and Developing
Countries Between 1980 and 2001.
 FDI Inflows (million US$)                                        Industrialised Countries   Developing Countries

 1400000



 1200000



 1000000



  800000



  600000



  400000



  200000



        0
        1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001


Source: UNIDO Statistics compiled from the International Finance Statistics (from International
Monetary Fund) according to UNIDO List of Countries and areas in selected groupings in the
International Yearbook of Industrial Statistics 2002.

In addition, the top ten exporters of direct investment capital accounted for more than 90
percent of the world total in the period 1989-1993 while the top ten recipients accounted for
more than 75 percent of reported inflows. However, six of the top ten exporters were also
among the top ten recipients (Gaston and Nelson, 2002, page 442). In addition, the exporter
group which usually encompasses the United States of America, the United Kingdom, Japan,
France, Germany, Canada, the Netherlands, Spain, Belgium/Luxembourg and Sweden has
been extremely stable over time.

These statistics suggest that the bulk of FDI follows an intra developed country trend (Gaston
and Nelson, 2002, page 442) even though China as well as a number of Emerging Economies
(such as the Asian Tigers: Korea, Hong Kong, Singapore and Taiwan as well as Brazil,
Mexico and Argentina) have been strong FDI recipients over the past decade. In fact,
although the bulk of FDI until 1990 was concentrated in the manufacturing sector, this trend
has been reversed since the 1990s as the tertiary sector accounts for the majority of FDI. The
latter trend tends to reinforce the intra developed country feature of FDI patterns (Gaston and
Nelson, 2002, page 442).

Hence in view of this intra developed country orientation that they follow, foreign direct
investment flows should have very significant effects upon labour markets in developed
countries. In other words, in order to obtain a global view on delocalisation, one should bear
in mind the influence of foreign direct investment flows rather than single out international
subcontracting into developing countries as the cause for labour market changes in developed
countries. Many studies have in fact been conducted to account for labour market changes in
developed countries in the context of foreign direct investment.




                                                                                                                    21
                B. FDI into developing countries as complements and FDI into developed
countries as substitutes to domestic labour in industrialised countries:

Brainard and Riker (1997) study the effects of US multinationals on the labour market of the
US economy. They use a three-dimensional data panel, in which each firm’s production
activities in up to 90 countries are tracked over a ten-year period ending in 1992, yielding
approximately 70,000 firm-country-time observations. They also include all firms whose
parent industry is in the manufacturing sector. The panel thus includes data on an annual basis
for each reported affiliate and parent on employment, employee compensation, exports, sales,
location, and a three-digit industry identifier (page 6). They find that labour in the US does
compete with labour abroad via multinational production (page 17). However, their results
indicate that substitution between labour employed by parents in the US and affiliates abroad
is low. In fact, they argue that labour substitution is far greater between affiliates at similar
levels of development. That is, labour within affiliates in developing countries competes with
labour in other developing countries and labour within affiliates in industrialised countries
competes with labour in other industrialised countries (page 17).

In another study, Riker and Brainard (1997) use the same methodology and empirical
techniques and find that affiliate activities in developing countries are complementary to
rather than substituting for affiliate activities in industrialised countries. For instance, they
show that in the electronic components industry, a 10 percent decline in affiliate wages in a
developing country leads to a 1.9 percent increase in affiliate employment in industrialised
countries. This wage decline causes a 3.7 increase in employment in local affiliates in that
country while reducing affiliate employment in other developing countries by 6.3 percent
(pages 18-19). This effect occurs in the following manner: reduced wage costs in a
developing country causes the demand for labour in that country to increase at the cost of
labour in other developing countries. Furthermore, as a result of the vertical relations between
the production processes of developed and developing countries, the decrease in wages in the
developing country and the resultant increase in products will cause an increase in the demand
for labour in the developed country. In other words, when employment shifting takes place, it
does so between offshore affiliates in less developed countries. Hence, the effect is not
substitution between workers at foreign affiliates and workers in industrialised nations, but
substitution between other low-wage locations (Gaston and Nelson, 2002, pages 445-446).

Lawrence (1994) uses data on US multinationals compiled from benchmark surveys by the
US Bureau of Economic Analysis in 1977 and 1989 and finds that overall multinationals are
not necessarily attracted abroad simply by cheap labour: only about a third of US
multinational affiliate employment is in developing countries (pages 22-23). In contrast,
Lawrence argues that the catalyst for domestic labour market changes in the US was
essentially domestic and reflects ongoing technological shocks “that would be present even if
the US economy was closed” (page 39).

In addition, Slaughter (2000) quoted in Feenstra and Hanson (2001, pages 26-27) finds that
FDI was not an important channel for moving US jobs abroad. Between 1977 and 1989,
employment in majority-owned affiliates of US multinationals fell as it did in the US parents
of these plants. In other words, employment at home and employment abroad were not
substitutes.




                                                                                              22
                 C. Summary of the labour effects of FDI:

FDI flows follow above all a North-North pattern. Over the 1980-2001 period, on average 76
percent of annual FDI flows were aimed at developed countries. The findings that we have
surveyed to this effect suggest in addition that the substitution of productive activities occurs
between countries at similar levels of development. In contrast, productive activities between
developed and developing countries appear to complement each other.

It is essentially this type of policy that the United Nations Industrial Development
Organisation aims to promote in the context of North-South international subcontracting:
facilitating “win-win” international partnerships based upon complementary productive
activities between developed and developing countries rather than a substitution of activities
between the North and the South.

        4) The role of UNIDO in promoting complementary productive activities:

The United Nations Industrial Development Organization programme for Industrial
Subcontracting and Supply Chain Management recently conducted some case studies
focusing on the partnerships established between subcontractors and contractors using its SPX
network. The examples stemmed from agreements made in Central and South America
(Argentina, Brazil, Chile, Colombia, Cuba, Guatemala, Mexico, Paraguay, Peru, Uruguay),
Africa (Algeria, Senegal, Tunisia and Mauritius), Asia (Turkey and India) and Eastern Europe
(Slovakia)1.

Among the case studies mentioned a number of them consisted of international agreements
made between a local subcontractor and an international client of developed country origin.
The conclusions emanating from these examples illustrate the usefulness of an SPX as a
matchmaking entity capable of fostering relationships at an international level. As the
previous sections of our study have shown these illustrations of subcontracting agreements
are beneficial to both sides.

On the one hand, the international clients acquired high quality parts or components at a low
cost thereby gaining productivity and achieving a higher level of international
competitiveness. On the other hand, subcontractors recorded employment increases, increases
in production and also benefited from technology transfers. The latter further facilitated
export promotion in certain regions.

Essentially however, many of the relationships used in the surveys were of two types. The
first type of relationship involved subsidiaries of international companies located in
developing countries used for commercial distribution of the product in the regional market.
The second type of relationship consisted of subcontracting part of the supply chain to a low-
cost developing country subcontractor. Once the part, component, assembly, sub-assembly or
packaging completed, the product would then be transferred back to the developed country for
further industrial work.

Hence, in essence, these agreements were win-win industrial partnerships where the activity
of subcontracting into the developing regions acted as a complement to, rather than a
substitute for the production processes of the developed-country companies. In this sense,
subcontracting did not lead to the delocalisation of plants from the developed nation to the
developing country.



1
 The examples are taken from: de Crombrugghe, Bhushan and Roman, 2001 and de Crombrugghe and Garrigós-
Soliva, 1997.


                                                                                                   23
Moreover, in certain cases, the activities and role of UNIDO have assisted in preventing
industrial sites from closing down and thereby preventing jobs from being lost. For instance,
in 1994, French-based electronics subcontractor Polytech relocated part of its supply chain to
Morocco and thereby prevented the whole enterprise from closing down (Lortal, 1994, page
5).

As part of its programme for the development of subcontracting in Arab nations, UNIDO
supported Polytech in relocating one of its 11 manufacturing processes phases to Morocco by
setting up Novaprim. Indeed, French electronics subcontractors were losing ground and
clients to their Asian competitors and Polytech was therefore at a critical phase. Thanks to the
SPX in Morocco and to UNIDO’s initiative, the company was able on the one hand to
recuperate French markets and on the other to develop greater market share. Furthermore,
about 100 jobs were created in Morocco as well as 15 to 20 jobs in France. In addition, the
enterprise was able to become more flexible and capable of responding to a variety of
electronics subcontracting requests (Lortal, 1994, pages 5 and 42).

        5) Conclusion:

Delocalisation is a concept which embraces many facets of the global economy taking into
account on the one hand natural market-driven activities and on the other deliberate enterprise
strategies. In other words, delocalisation refers not only too international subcontracting
activities between developed and developing countries but also occurs in form of foreign
direct investment. Indeed, the impact of FDI between developed countries on their labour
forces is very often neglected at the cost of targeting international subcontracting into
developing countries as a cause for labour market changes within many OECD nations.

In this chapter, we have presented a broad view of delocalisation taking into account
academic studies concerning the impact of international subcontracting and FDI on labour
market changes in OECD nations.

Firstly, in the context of international subcontracting, the evidence is split into two groups.
One school of thought argues that international trade with developing countries is too small to
account for labour market changes in developed countries. Instead, the cause for these labour
market changes is found in domestic factors such as technological changes. Another school of
thought, led by economists Feenstra and Hanson, argues that international trade has the same
effect as these technological changes. Furthermore, they argue that both have a negative effect
on the unskilled portion of workers in developed countries. We have suggested that this
phenomenon is in fact a natural end result of the competitiveness of nations within a global
economy, where developed and developing countries make the most efficient use of the
resources in which they are better endowed. In other words, developing countries focus on
labour-intensive (low-skill) activities while developed countries focus on capital-intensive
(high-skill) activities.

Secondly, in the context of FDI, we have shown through a number of academic studies -
mostly based on US multinationals - that FDI into developing countries acts as a complement
to the domestic labour force rather than a substitute. The studies also indicate that the
substitution of productive activities is a phenomenon that occurs with countries at similar
levels of development, in other words between labour forces of developing countries or
between labour forces of developed countries.

It is this philosophy that UNIDO adopts and strives to follow through its SPX network:
promoting complementary-based “win-win” industrial partnerships between developed and
developing country partners. To illustrate this point further, we shall in the following section,
use a number of case studies based upon specific partnerships in the SPX network.



                                                                                              24
V. CASE STUDIES FROM THE SPX NETWORK:
        1) Methodology:

                A. Background:

In order to analyse the issue of delocalisation and building upon some of our earlier work, the
Industrial Subcontracting and Supply Chain Management programme conducted a survey
using as a source its large and geographically diverse pool of SPXs. Indeed, many of the
SPXs have not only been used as a platform for the promotion of subcontracting between
local suppliers and national clients but have also fostered partnerships with international
clients in an extensive number of cases.

Therefore, the large number of companies registered within the established SPXs would
clearly constitute a good population from which to draw a sample for a survey on the role of
international subcontracting and its position vis-à-vis delocalisation. The SPXs were hence
requested to provide very detailed and specific information at the company/partnership level
rather than personal impressions. Some of the questions required an intimate knowledge of
the partnerships as well as the bilateral benefits (i.e. contractor and subcontractor) entailed by
the partnerships. It is therefore assumed that a very high correlation exists between the
answers provided and reality.

                B. Content of the questionnaire:

The questionnaire was drafted in English (see appendix 1) and then translated into both
French and Spanish. In addition, an explanatory letter was attached to the questionnaire in
order to provide the recipient with some background information on the survey and its
purpose (see appendix 2).

The questionnaire consisted of three sections, namely “Background Information”, “General
Information on the SPX” and “International Partnerships”. The section on “Background
Information” simply asked for the name of the SPX, the name of the person filling in the
questionnaire as well as the date of the SPX’s establishment. The following section entitled
“General Information on the SPX” requested the respondent to briefly enumerate the sectors
represented in the SPX and the scope of the partnerships at three levels, namely local, national
and international.

The reason for integrating both these sections was simply to have a historical perspective on
the specific SPX’s activities; to be able to determine how important international partnerships
were in relation to the total number of partnerships formed and to provide a brief summary of
the main sectors represented in the SPX.

The third section of the questionnaire, “International Partnerships”, requested the respondent
to use up to four examples of partnerships involving international partnerships between an
international company and a local subcontracting counterpart. We noted moreover that
international partnerships in the electronic, electric, chemical, metal, mechanical or plastics
sectors were preferable because these are the sectors which induce a large number of
interdependent production processes and in which therefore there was a large potential of
international networking between countries.

This section consisted of 13 parts that follow one another in a logical manner. The first and
second part respectively asked for the main contractor’s industrial sector, name and country of
origin and the subcontractor’s industrial sector and name. The country of origin was
obviously a key feature of the questionnaire as the debate is a geographical one in nature


                                                                                               25
consisting of a substitution of the labour force in the North by a labour force in the South. The
third question followed upon the previous two by asking for the type of product (or service)
that the subcontractor produced (or supplied) in the context of the partnership selected.

The fourth and fifth parts were crucial to the survey as they respectively asked the respondent
to determine whether the product produced (or service supplied) existed in the home country
of the main contractor and whether it was sent back to this home nation for additional
assembling or processing as part of the supply chain. Indeed, these two points were important
because the answers would enable us to suggest whether there was indeed a substitution of
activities in the developed country by a labour force in the developing country or rather that
the activities were complementary illustrating an international division of labour. The
questions were closed ones in the sense that they were of the yes/no type and could easily be
obtained from the main contractor.

The following three sections related firstly to the length of the partnership, secondly to the
number of additional jobs created for the subcontractor/supplier thanks to the agreement and
finally to the revenue it generated as a result of the partnership. These questions were
integrated in order to determine the potential benefits that the subcontractor gained from the
relationship thereby demonstrating one side of the win-win situation that international
subcontracting would entail, namely the subcontractor’s side.

The next section asked the respondent to supply any information which shows the way in
which the subcontractor by networking back with enterprises from the main contractor’s
home country created additional jobs there.

The final four sections requested information firstly on the contact details of the main
contractor, secondly on the benefits the partnership generated for the main contractor in the
industrialized country in terms of competitiveness, thirdly on the benefits it gained in terms of
market share and finally on the benefits it gained in terms of job creation. The answers to the
last three questions would act as illustrations for the second side of the win-win situation that
international subcontracting generates, namely the main contractor side.

                C. Selection of respondents and response rate:

In total, 16 SPXs received the questionnaire via email in the end of February 2003, six of
which were English-speaking, four French-speaking and six Spanish-speaking. The sampling
process was based upon previous publications, knowledge of specific international
partnerships within the SPXs and their geographical locations all of which suggested that
there was a high chance of finding international partnerships in the selected SPXs. Reminders
on a number of occasions were sent out to all recipients that had not replied. Furthermore,
further clarification on certain responses was requested via email.

By the end of June 2003, 13 SPXs had replied. In total, eight SPXs provided concrete
examples of international partnerships, some involving international partners from developed
countries (USA and EU) and others involving partners from other developing countries. In
total, 14 cases of international partnerships were obtained, as table 3 shows. Another seven
commented on the survey without filling out the questionnaire. The response rate of nearly 50
percent is very satisfactory (even though the active interest of the SPXs in UNIDO’s activities
nears 82 percent).




                                                                                              26
Table 2: Summary of Responses.
Country / City of SPX:          Examples      Nationality of Main          Other Responses:
                                Obtained:          Contractor:
Argentina / Buenos Aires           0          NA                                  YES
Brazil / Sao Paulo, Sebrae         0          NA                                  NO
Costa-Rica / San José              2          1. USA                              YES
                                              2. USA
Côte d’Ivoire / Abidjan              0        NA                                  YES
India / Hyderabad                    0        NA                                  YES
India / New Delhi                    2        1. China                            YES
                                              2. China
India / Pune                         1        1. Singapore                        YES
Mexico / Querétaro                   0        NA                                  YES
Morocco / Casablanca                 0        NA                                  NO
Paraguay / Asunción                  2        1. Paraguay                         YES
                                              2. Brazil
Senegal / Dakar                      0        NA                                  YES
Sri Lanka / Colombo                  2        1. The Netherlands                  YES
                                              2. Germany
Slovakia / Bratislava                2        1. Germany                          YES
                                              2. France
Tunisia / Tunis                      0        NA                                  NO
Turkey / Istanbul                    2        1. United Kingdom                   YES
                                              2. Germany
Uruguay / Montevideo                1         1. Argentina                        YES
Total:                              14        /                                    13

                D. Comment on the questionnaire and answers:

The answers that were obtained necessitate a number of comments. Firstly, not all sections of
the questionnaires that were obtained were filled out. Indeed, in a number of cases either the
questions or sections were not applicable to the case mentioned, or the information was not
available or was considered confidential.

Secondly, with regards to section four of the questionnaire, namely the section asking the
respondent to determine whether the product existed in the home nation of the main
contractor, a number of interpretations are possible. Indeed, if the answer is positive (i.e. that
the product existed in the home nation of the main contractor), it could either mean that the
main contractor was forced to use international subcontractors rather than national ones
because no spare capacity was available in the home country to undertake the tasks. The
alternative is that the main contractor decided not to use national subcontractor for a variety
of strategic reasons. In contrast, if the answer is negative, no interpretational problems occur:
the product simply did not exist in the home nation of the main contractor.

Thirdly, the questionnaire specifically requested the respondent to provide examples using
international partners. As table 3 shows, eight of the partnerships involved partnerships with
enterprises from developed countries (United States and European Union). The remaining six
examples consisted of partnerships with partners from other developing or emerging
economies. This pattern is very important as it would enable us to confirm or contrast the
evidence laid out in the previous section, i.e. whether delocalisation takes place with countries
at similar levels of development or not.




                                                                                               27
        2) Presentation and analysis of the survey results:

                A. Costa Rica:

        i - The Bolsa de Subcontratación Industrial de Costa Rica:

The Bolsa de Subcontratación Industrial de Costa Rica was launched in November 1995 and
has subcontractors and suppliers registered in the following fields:

                    1)   Metal
                    2)   Mechanical
                    3)   Plastic
                    4)   Electronic
                    5)   Packaging

The BSA de Costa Rica provided two examples involving international subcontracting
partnerships.

        ii - Case 1: Trimpot Electronicas (USA) and Desarrollos AKA Precision S.A.:

The first case consisted of an agreement made between a subsidiary of the American electrical
company Bourns, namely Trimpot Electronicas S.A., located in Costa Rica and a local
metal-mechanical subcontractor, Desarrollos AKA Precision S.A..

The subcontractor was requested to assemble machines for electrical components and the
partnership was defined as a permanent one involving on average two months per contract.
The subcontractor benefited substantially. Indeed, over a period of five years, about 50 teams
of employees were involved and the revenue generated for the subcontractor was on average
100,000 US$ per year. Moreover, as a result of the cooperative agreement, 10 more jobs were
created within Desarrollos AKA Precision S.A. itself along with a number of other second
and third tier party jobs. This demonstrates the economics of externalities or spillovers
implied by backward linkages. Backward linkages are much more pronounced in the
manufacturing industry than in the primary or tertiary sector. The manufacturing sector is
indeed an excellent breeding ground for this phenomenon as a result of the large number of
interdependent but neatly distinct stages of production (Morcos, 2002, page 37).

The main contractor also gained substantially from the relationship. The advantages consisted
of technological improvements as well as cost reductions thereby improving the
competitiveness of the multinational. This increase in competitiveness also enabled the
company to possibly develop greater market share.

Furthermore, the establishment of the partnership stemmed from the fact that the product that
Trimpot Electronicas S.A. requested from the Costa-Rican subcontractor did not exit in the
home nation of the parent firm. Upon completion of the duties by the subcontractor, the
machine assembly of the electric components undertaken by Desarrollos AKA Precision
S.A. did not undergo further processing in the home nation of Trimpot Electronicas S.A.’
parent firm. In this way, the industrial activities of the subcontractor were complementary to
those of the contractor and did not therefore involve any substitution of its activities and
hence no conflict of interest between the USA and Costa Rica.

This example illustrates the advantages that both entities gained as a result of the contractor
subcontracting part of its supply chain into Costa Rica and also exemplifies the geographical
complementarity of their production processes.




                                                                                            28
        iii - Case 2: Babyliss C.R. – CONAIR – (USA) and Cia Leogar S.A.:

The second case consisted of a collaboration between a Costa-Rican subsidiary of the
American multinational CONAIR, Babyliss C.R., and Cia Leogar, a Costa-Rican supplier
specialised in the manufacturing of components (particularly metallic components).
Moreover, CONAIR is a major producer of electrical appliances and is recognised as one of
the largest producers of hair dryers in the world. In this context, Babyliss C.R. requested the
subcontractor to provide pipes and metallic covers required for the completion of professional
dryers. The collaboration lasted for a whole year and enabled the subcontractor to add one
major international contract to its customer base.

The agreement enhanced the contractor’s competitiveness as it provided it with a facilitated
access to inputs and also permitted it to enter into a new market niche. Moreover, importantly
it was indicated that the pipes and metallic covers didn’t exist in the USA and that the partly
completed product was sent back to the USA for further processing. In this way, by
networking with entities in the home country of Babyliss C.R.’ parent firm, this
subcontracting agreement led to the creation of 40 new employment opportunities in the
United States. Furthermore, the contractor reportedly generated a new service line as a result
of the partnership and thereby also created more jobs.

As was the case in the previous example, the fact that the pipes and metallic covers were not
available in the home nation of the parent firm of Babyliss C.R., namely in the United States,
illustrates the complementarity of the assets, technologies and production processes of the
home countries of the parties involved.

         iv - Contact details for the Bolsa de Subcontratación Industrial de Costa Rica:

For further information on the Bolsa de Subcontratación Industrial de Costa Rica or on the
case studies, please contact:
Miss Barbara Campos Ballard, SPX Manager
Address: Bolsa de Subcontratación Industrial de Costa Rica, Cámara de Industrias de Costa
Rica, 300 metros Sur de la Fuente de la Hispanidad San Pedro, San José, Costa Rica
Tel: +506 281 0006
Fax: +506 234 6163
E-Mail: bcampos@cicr.com

                B. India - New Delhi:

         i - The CII-UNIDO Subcontracting and Partnership Centre (CII-SPX) of New Delhi:

The CII-UNIDO Subcontracting & Partnership Centre (CII-SPX) of New Delhi was
established in 1999 and has local subcontractors and suppliers from the following industrial
sectors represented in its computerised roster:

                    1)   Metal Working
                    2)   Automotive
                    3)   Mechanical & Electrical Engineering
                    4)   Plastic & Rubber Component
                    5)   Electronic

Furthermore, the SPX of New Delhi has been very effective in establishing a hybrid mix of
partnerships for the registered subcontractors. Indeed, about 65 percent of the partnerships
realised or facilitated thanks to the SPX of New Delhi are of an international nature.
Partnerships at the national level represent about 20 percent of the partnerships and local ones
account for the remaining 15 percent. As a result of this large pool of international agreements


                                                                                             29
formed thanks to the services that it offers, the SPX of New Delhi supplied two examples
involving a Chinese contractor and a local Indian counterpart.

        ii - Case 3: Yiyuan Electric Light Sources Co Ltd (China) and Lumax Industries Ltd:

A Chinese enterprise in the electrical sector, Yiyuan Electric Light Sources Co Ltd formed
a partnership with the Indian subcontractor Lumax Industries Ltd in order to obtain lighting
equipment namely torch bulbs and signalling bulbs.

The example encompassed a number of interesting aspects. Firstly, even though the
equipment that Lumax Industries Ltd supplied to its Chinese counterpart was sent back to
China for further processing or assembling thereby possibly generating additional
employment opportunities, the equipment was reported as existing in China. In this sense, the
establishment of the partnership between Lumax Industries Ltd and Yiyuan Electric Light
Sources Co Ltd could potentially have caused a substitution of the labour force in China by
an Indian labour force. However, this potential substitution effect among emerging economies
is more in line with the evidence we put forward earlier in the study, namely that
delocalisation is more often associated with nations at similar levels of development rather
than between a developed country and an emerging economy/developing country.

However, despite the latter, both Yiyuan Electric Light Sources Co Ltd and Lumax
Industries Ltd gained from the cooperative agreement. No less than 15 new employment
opportunities and 0.1 million Indian Rupees’ worth of revenue were generated for the latter
whilst the former improved its business efficiency through reduced costs thereby enhancing
its competitiveness and experienced robust growth in its market share.

        iii - Case 4: Fasten Group Co (China) and Anikka International PVT Ltd:

The second example provided by the SPX of New Delhi again involved a Chinese contractor
that produces metal products, Fasten Group Co, and the Indian subcontractor, Anikka
International PVT Ltd. Anikka International PVT Ltd was requested to provide stainless
steel telecommunication materials. However, the materials were reported as existing in China
and once the materials were obtained from the Indian subcontractor, they were not sent back
to the home nation for further processing or assembly. Hence, the scope for the generation of
job opportunities back in China resulting from this further processing or assembly is relatively
low if not non-existent. As case 4 showed, the existence in China of the material provided by
the Indian manufacturer tends to support the employment substitution argument between both
countries, which are at the same level of economic development.

Nevertheless, thanks to the partnership, on the one hand, the Indian manufacturer was able to
employ an additional five individuals and generated about 0.2 million Indian Rupees in
revenue. On the other hand, the Chinese enterprise was able to become more competitive by
having access to higher quality materials available at a low cost by virtue of the specialist
skills of Anikka International PVT Ltd. This then enabled Fasten Group Co to increase its
market share.

         iv - Contact details for the CII-UNIDO Subcontracting and Partnership Centre:

For further information on the CII-UNIDO Subcontracting and Partnership Centre (CII-SPX)
of New Delhi or on the case studies, please contact:
Ms. Sonia Braha, SPX Manager or Mr. Suvendu Mahapatra
Address: Industrial Subcontracting and Partnership Exchange of New Delhi, Confederation
of Indian Industry - CII, Indian Habitat Centre, 4th Floor, Core 4A, Lodi Road, New Delhi
110 003, India
Tel: +9111 4682 230 or +9111 4629 994


                                                                                             30
Fax: +9111 4682 229
E-Mail: Sonia.bhrara@ciionline.org or suvendu.mahapatra@ciionline.org

                C. India - Pune:

        i - The Industrial Subcontracting and Partnership Exchange (SPX) of Pune:

The Industrial Subcontracting and Partnership Exchange (SPX) of Pune has a wide variety of
359 subcontractors and suppliers registered in its database. The breakdown is as follows:

                     1) Automotive Components (10)
                     2) Sheet Metal Industries - Press Parts (56)
                     3) Machining Industries (44)
                     4) Forging Industries (11)
                     5) Casting Industries (11)
                     6) Metal Working Industries (65)
                     7) Manufacturing of Machinery & Equipments (53)
                     8) Rubber Industries (27)
                     9) Plastic Industries (29)
                     10) Electrical & Electronics Industries (50)
                     11) Miscellaneous (3)

        ii - Case 5: Santana Brothers MFG PTE Ltd (Singapore) and Pune Metagraph:

The SPX of Pune supplied information concerning a one-year agreement made between
Santana Brothers MFG PTE Ltd - a Singapore-based automotive enterprise - and Pune
Metagraph - an automobile sector subcontractor. The purpose of the partnership was for the
subcontractor to supply decorative laminates (graphics) printed on vinyl and to be pasted on
the panels and fuel tanks of the motorcycles.

In this case, the tasks required by the Singaporean contractor were reported as existing in the
home country as well as in India. Moreover, once the laminates were supplied, they were not
sent back to the home nation for further assembly or processing. As was the case with earlier
examples, there seems to be a potential substitution of activities between both Singapore and
India.

However, both partners gained from this relationship. Pune Metagraph recorded four extra
jobs in different levels of design and textures and also received 160,000 Indian Rupees in
revenue. Santana Brothers MFG PTE Ltd, the Singaporean counterpart, acquired good
quality laminates at a competitive cost and hence was able to further its competitiveness. In
addition, it was able to maintain its market leadership and therefore market share in Singapore
thanks to the availability of these products. Finally, thanks to the availability of freed
resources, it also created additional employment, specifically in its marketing and sale
compartments, in order to promote and market their newly positioned product in Singapore.

         iii - Contact details for the Industrial Subcontracting and Partnership Exchange
(SPX) of Pune:

For further information on the Industrial Subcontracting and Partnership Exchange (SPX) of
Pune or on the case studies, please contact:
Ms. Tejaswini Gogate, CII Director or Mr. Ajay Todkar
Address: Industrial Subcontracting and Partnership Exchange (SPX) of Pune, c/o CII office
Pune (Confederation of Indian Industry - CII), Bungalow number 2, Ganeshkhind Road, Near
Rahul Cinema, Pune 411 005, India
Tel: +9120 5536 590 or +9120 5536 159 or +9120 5534 296


                                                                                            31
Fax: +9120 5536 892
E-Mail: ciipune@vsnl.com or ciipspx@vsnl.net

                D. Paraguay:

        i - The Bolsa de Subcontratación del Paraguay:

The Bolsa de Subcontratación del Paraguay was established in October 1991 and has
subcontractors and suppliers registered in the following industrial sectors:

                    1) Metal
                    2) Mechanical
                    3) Plastic and Rubber
                    4) Electrics
                    5) Electronics
                    6) Textiles
                    7) Agro-Industries
                    8) Industrial Services
                    9) Textiles
                    10) Wood

The matchmaking activities of the BSA del Paraguay results in the majority of cases in local
partnerships. About 60 percent of the partnerships fostered thanks to the BSA del Paraguay
are local ones with 30 percent at the national level and only 10 percent at international levels.
Two international partnership agreements were mentioned.

        ii - Case 6: Mc. Donald’s (Paraguay) and Industrias Fatecha:

The first example provided by the BSA del Paraguay is an ongoing partnership involving Mc.
Donald’s Paraguay and a local bread supplier, namely Industrias Fatecha, which supplies
bread to Mc. Donald’s for commercialisation in Paraguay.

The products supplied by Industrias Fatecha were originally imported from Argentina. As a
result of the local procurement, the partnership was successful in being a substitute to imports
for the Paraguayan economy. This illustrates again the labour force substitution-effect
between two developing countries, Argentina and Paraguay. In addition, by virtue of the
product’s nature, it could not undergo additional processing.

The partnership generated many advantages for the local bread supplier. First of all, the
formation of the partnership helped Industrias Fatecha reduce its spare capacity by virtue of
the extra orders created by Mc. Donald’s Paraguay. In fact, the supplier is in a process of
widening the variety of bread products supplied. Secondly, the agreement generated three
extra employment opportunities. Finally, it also helped the supplier gain 15,000 US$ per year
in revenue, a figure that could increase.

In addition, for Mc. Donald’s, the main benefit was the fact that the partnership with
Industrias Fatecha helped it reduce its logistical costs.

        iii - Case 7: Local Paraguayan supplier and large Brazilian company:

The second partnership mentioned by the BSA consisted of an agreement in the heavy and
light clothes textiles industry between a Brazilian enterprise and a medium-sized Paraguayan
subcontractor. At the time of writing this paper, the partnership was still ongoing (with a
duration of over a year). Here, the subcontractor was responsible for a number of textile-
related activities despite their availability in Brazil; namely cutting, ironing and knitting.


                                                                                              32
Before their ultimate commercialisation, the partly completed products were sent back to
Brazil for further processing upon completion of the activities in Paraguay.

Despite the resulting possibility of a substitution of activities from Brazil to Paraguay, each
party gained from the agreement. On the one hand, the medium-sized Paraguayan supplier
cooperated with two small-sized second and third tier local tailor workshops with an average
of 30 employees and generated approximately 50,000 US$ per contract. On the other hand,
the Brazilian main contractor realised production cost reductions thereby enhancing its
competitiveness that resulted in it gaining a greater share in the Brazilian market.

         iv - Contact details for the Bolsa de Subcontratación del Paraguay:

For further information on the Bolsa de Subcontratación del Paraguay or on the case studies,
please contact:
Ms. Victoria Valdez, SPX Manager
Address: Bolsa de Subcontratación del Paraguay, CEDIAL - Centro de Cooperación
Empresarial y Desarrollo Industrial, Cerro Corá 1038, Piso 2, Edificio Unión Industrial
Paraguaya (UIP), Asunción, Paraguay
Tel: +5952 1230 047 or +5952 1495 724 or +5952 1498 177
Fax: +5952 1495 724
E-Mail: bolsa@cedial.org or bsp@cedial.org

                E. Slovakia:

        i - The Subcontracting and Partnership Exchange of Slovakia:

The Subcontracting and Partnership Exchange of Slovakia was established in 1994 and
represents a very unusual SPX as 100 percent of the partnerships that they help foster for their
subcontractors and suppliers are formed at the international level. In fact, the majority of
requests received by the SPX of Slovakia come from companies of Western European
countries (France, Germany, Belgium, Switzerland, the Netherlands, Austria etc).

Moreover, the subcontractors and suppliers registered in the SPX’s database come from the
machinery industrial sector (casting and forging, machining, welding, tooling, plastic parts,
metal sheet forming, etc).

In this context, the SPX of Slovakia submitted two interesting examples of international
partnerships.

        ii - Case 8: Ingersoll-Rand Group (USA) and Topoz, Team Industries and BMZ:

The first example referred to a partnership involving a network of four main contractors, Air
Solutions, Portable Power; French-based IR-Montabert and German-based IR-ABG. All
four companies are enterprises registered under the trading name of the American corporate
giant Ingersoll-Rand (IR) that has a history going all the way back to 1871. The first two
companies, Air Solutions and Portable Power, are respectively industrial solutions and
infrastructure subsidiary brands of Ingersoll-Rand (IR) whilst the other two IR-Montabert
and IR-ABG, also infrastructure subsidiaries, were acquired by Ingersoll-Rand (IR) in the
1990s and now form an integral part of the Group.

In fact, Ingersoll-Rand (IR) had previously established a subcontracting agreement with
members of the SPX of Slovakia. After a long screening process, Ingersoll-Rand (IR)
selected seven Slovak suppliers for two of its projects for the production of pressure vessels
and hydraulic cylinders its world-renowned affiliates Bobcat and Thermo King. Ingersoll-
Rand (IR) required steel structures and welded parts for Bobcat valued at US$50 million and


                                                                                             33
sheet metal parts for Thermo King valued at US$10 million. Following completion of this
project, Ingersoll-Rand (IR) consolidated its cooperation with the SPX of Slovakia through
the following partnership.

The Ingersoll-Rand (IR) affiliated companies (Air Solutions, Portable Power, IR-
Montabert and IR-ABG) contacted the SPX of Slovakia in order to acquire welded and
machined parts and components from subcontractors registered in its database. A network of
three machinery-sector subcontractors, Topoz, Team Industries and BMZ, was eventually
selected to perform six projects. The value of the partnership was not supplied as it was
considered confidential.

The partnership lasted about a year and generated many benefits, mostly for the main
contractors. First of all, the welded and machined components and parts were obtained at a
relatively low price and thereby facilitated the success of the main contractors’ final products
on the market hence contributing to their competitiveness. This in turn enabled the Ingersoll-
Rand (IR) network to increase its market share.

However, it was also indicated that the supply of welded and machined components was an
activity that existed in Germany and France and therefore could have been undertaken there.
Nevertheless, the activities undertaken by the Slovakian subcontractors and suppliers were
only an intermediary process leading to the completion of the final products. Indeed, the
Ingersoll-Rand (IR) network only subcontracted part of their supply chain to Slovakia
whereby the completed components were eventually sent back to the home nations of Air
Solutions, Portable Power, IR-Montabert and IR-ABG for further assembling or
processing.

The Slovakian subcontractors concentrated on the supply of welded and machined parts and
by networking back with other German and French companies helped create more
sophisticated, high skill and high added-value jobs in both countries. It was in addition noted
that the partnership formed between the Ingersoll-Rand (IR) network and the Slovakian
network of subcontractors helped the Ingersoll-Rand (IR) entities create more than 60
employment opportunities in their home nations, namely France and Germany.

On the whole therefore, it is difficult to estimate what the net job effect was in Germany and
France following the establishment of the partnership. On the one hand, the partnership
clearly led to the creation of a large number of high-skill job opportunities in France and
Germany. On the other hand, the subcontracted activities could have been conducted in the
home nations of the Ingersoll-Rand (IR) network. It must also be stressed that due to the
layout of the questionnaire the reason why they were not completed there cannot be given, for
instance whether this was due to cost differences between Germany/France and Slovakia or
because no spare capacity was available in Germany/France at the time the components were
needed.

The short time frame of the partnership (only a year), however, suggests that the reason for
subcontracting in Slovakia, was the lack of spare capacity in France and Germany, even
though no information was submitted on this matter.

        iii - Case 9: Pomagalski (France) and network of Slovakian subcontractors:

The second case consisted of a partnership between Pomagalski S.A., a French contractor
based in Grenoble, and a network of four machinery (ski-lifts) Slovakian subcontractors and
suppliers: VSZ Kosice (now part of US Steel), VUSAM Zvolen, KOHYT Kosice and ZSNP
Ziar nad Hronom.




                                                                                             34
The partnership lasted for a full year and involved the supply of welded construction
components (iron and pressure die casting). In total, VSZ Kosice was assigned six projects
and the other three a total of three projects. As in the previous case, the value of the
partnerships was not given as it was considered confidential.

The main benefits were generated mostly for the main contractor, Pomagalski S.A.. It was
able to enhance the value of its final product by obtaining welded construction components
from the Slovakian suppliers that meet international standards of quality warranty. Hence, this
enabled Pomagalski S.A. to increase its competitiveness in the French market and maintain
its market leadership.

Furthermore, this case also illustrates how subcontracting part of the supply chain
internationally is beneficial for the developed country as new jobs were created there. Indeed,
once the welded construction components were obtained from the Slovakian subcontractors,
they were then returned to France for additional assembling/processing. In this way, the
subcontractors were networking back with French companies and thereby helped create new
high-skill and high added-value employment opportunities there. Indeed, thanks to the
partnership, Pomagalski S.A. was able to generate about 40 new jobs in France.

However, it was noted that welded construction components existed in France and hence
could have been acquired there. Nevertheless, the short-term nature of the partnership with
the French company, just one year, again suggests that no spare capacity was available in
France at the time the components were needed by Pomagalski S.A., even though no
information was submitted on this matter.

         iv - Contact details for the Subcontracting and Partnership Exchange of Slovakia:

For further information on the Subcontracting and Partnership Exchange of Slovakia or on the
case studies, please contact:
Mr. Viktor Szijjarto, SPX Manager
Address: Subcontracting and Partnership Exchange of Slovakia (SES), Prievozska 30, 82105
Bratislava 2, Slovak Republic
Tel: +4212 5824 4208 or +4212 5341 7333
Fax: +4212 5824 4209 or +4212 5341 7311
E-Mail: szijjarto@nadsme.sk

                F. Sri Lanka:

       i - The Subcontracting and Partnership Exchange of Sri Lanka:

Established in May 2001, the Subcontracting and Partnership Exchange of Sri Lanka
possesses subcontractors and suppliers from the following sectors registered in its database:

                    1)   Engineering
                    2)   Rubber
                    3)   Plastics
                    4)   Electronics
                    5)   Electrics
                    6)   Coir

About 60 percent of the partnerships that are formed through the matchmaking activities of
the Sri Lankan SPX are of a national nature with international partnerships forming the rest.
Out of this pool of international partnerships, the SPX of Sri Lanka submitted two examples
of agreements involving international contractors, both of which were of European origin.



                                                                                             35
            ii - Case 10: FDN Trade BV (the Netherlands) and Sanford PVT Ltd:

The first partnership involved Dutch trading company, FDN Trade BV, and the local Sri
Lankan plastics supplier, Sanford PVT Ltd. It was requested to supply plastic and related
synthetic products. Negotiations for the partnership started in September 2002. Upon
submission of the plastic samples and following price negotiations, the Dutch counterpart
approved the samples. At the time of writing, the subcontractor was still awaiting the official
order.

The potential revenue that the subcontractor was expected to generate thanks to the agreement
is estimated at 7300 euros. It was not known whether the services offered by the Sri Lankan
supplier were available in the Netherlands but it was indicated that once the plastic and
related synthetic products would be supplied, they would not undergo further processing in
the Netherlands.

The main benefit for the Dutch contractor was reported as cost reductions, which is what Van
Eennennaam (1995), using a sample of Dutch firms, determined was the main reason pushing
Dutch companies to produce/outsource abroad2.

            iii - Case 11: Xedam-Design (Germany) and Kandyan Artcraft PVT Ltd:

The second example that the SPX of Sri Lanka sent consisted of a potential partnership
involving a German-based engineering and trading enterprise, Xedam-Design, and a local Sri
Lankan engineering foundry, Kandyan Artcraft PVT Ltd. It was requested to subcontract
handicraft products. Indeed, the partnership was, at the time of writing, in its very early stages
whereby the handicraft product samples of Kandyan Artcraft PVT Ltd were ready to be
sent and the business contacts one month away of being established.

However, it was noted, despite the project’s early stages, that the handicraft products required
by Xedam-Design were not available in Germany but would be sent back there for further
processing or assembling. This adds to our previous examples of international partnerships
involving European/American contractors and developing country subcontractors by showing
that there exists a complementarity between the production processes of the South and the
North rather than a substitution of activities.

Furthermore, both Kandyan Artcraft PVT and Xedam-Design would benefit from their
mutual involvement. If the project were to materialize, it was noted that the subcontractor
would be given an introductory order of US$ 1000 with the possibility of further yearly orders
ensuing. In addition, Kandyan Artcraft PVT works in close cooperation with a whole
network of second and third tier suppliers and subcontractors that it uses for the execution of
certain operations in relation to specific orders. Therefore, in the case of yearly orders arising
from the partnership with Xedam-Design, Kandyan Artcraft PVT would use this network
and thereby not only generate employment opportunities internally but also within the
network. This exemplifies the so-called industrial spillover effect, which was also found in
Case 1.

The partnership could turn out crucial for the German client Xedam-Design. Indeed, Xedam-
Design was in the process of introducing a new product into the market. Therefore, the
partnership with the Sri Lankan subcontractor would enable it to make cost savings and hence
to price the product competitively.




2
    This study was referred to earlier in this survey, see page 8.


                                                                                               36
         iv - Contact details for the Subcontracting and Partnership Exchange of Sri Lanka:

For further information on the Subcontracting and Partnership Exchange of Sri Lanka or on
the case studies, please contact:
Mr. M. N. R. Cooray, SPX Manager
Address: Subcontracting and Partnership Exchange (SPX) of Sri Lanka, c/o SMED (Small
and Medium Enterprise Developers) Level 04, Number 53, Vauxhall Lane Colombo - 02, Sri
Lanka
Tel: +941 585 931 or +941 304 287 or +941 304 288 or +941 304 289
Fax: +941 587 137 or +941 304 291
E-Mail: jlidc@slt.lk or smedspx@sltnet.lk

                G. Turkey:

        i - The Turkish Subcontracting and Partnership Exchange, Turk Yan Sanayi Borsasi:

The Turkish Subcontracting and Partnership Exchange was established in 1990. A very
effective SPX, it has no less 1200 local Turkish subcontractors and suppliers registered in its
database. The majority of them are enrolled in the following sectors:

                    1)   Metal
                    2)   Plastics and Rubber
                    3)   Electric
                    4)   Electronics

Over the past few years, the Turkish SPX has been extremely active in fostering international
partnerships between Western European contractors and local firms. Indeed, based on a
sample of 12 to 15 match-makings fostered by the SPX, partnerships have been established
between local Turkish subcontractors/suppliers from the metal, sheet metal, foundries and
machining sectors and foreign automotive and machine building contractors. However, most
of the partnerships last between six and twelve months with only a few lasting for more than a
year.

Although no information was provided on this matter and therefore should be analysed as
purely speculative, the short time frame of the international partnerships could be interpreted
as reflecting temporary partnerships that result from the home country of the foreign
contractor reaching a maximum capacity and thereby being unable to supply the contractor.
Two examples were thus supplied.

        ii - Case 12: Deltron Emcon Ltd (UK) and Arslan Makina:

Deltron Emcon Ltd is a British-based electrics and electronics company and was able to
establish a partnership with the aluminium casting Turkish supplier Arslan Makina thanks to
the matchmaking activities of the Turkish SPX.

Arslan Makina’s task was to supply aluminium-casting boxes to be integrated in the electric
and electronic products of its British partner. The partnership lasted for a period of two years
and enabled the Turkish subcontractor to create six additional employment opportunities.
Over this period, the Turkish subcontractor was able to generate 351,100 euros per year. It is
clear therefore that it gained substantially from the contract.

Due to the nature of the partnership it was necessary for the aluminium boxes supplied by the
Turkish enterprise to be sent back to the United Kingdom for further processing or
assembling. Despite the latter, over the two-year period, it was reported that aluminium-
casting boxes used for future integration into electric and electronic products did exist in the


                                                                                              37
United Kingdom. Hence, there is scope for arguing that a Turkish labour force substituted a
German one. In fact, the length of the partnership suggests the decision to subcontract in
Turkey was based on strategic reasons (e.g. cost differences, quality etc), even though no
information was submitted on this matter.

        iii - Case 13: AS-KA GmbH (Germany) and Ozkar Otomotiv Parcalari Sanayi A.S.:

The second example provided by the Turkish SPX involved a German bicycle manufacturer,
AS-KA GmbH and a local Turkish automotive-and-motorcycle-sector subcontractor Ozkar
Otomotiv Parcalari Imalat Sanayi A.S..

In this case, the Turkish subcontractor was requested to assemble a bicycle trailer. The
partnership lasted for a period of two years and over this period the Turkish subcontractor
created seven additional jobs thanks to the contract and also generated about 250,000 euros in
revenues.

Once the task was completed the component was not sent back to Germany for additional
processing or assembling. In fact, the nature of the completed part, an assembled bicycle
trailer, rules out (or at least reduces) the possibility of it undergoing further processing or
assembling, as indeed it represents the end part in the supply chain. However, the assembly of
bicycle trailers was reported as an activity that existed in Germany and this also points to the
same direction as the previous example, case 12. In other words, the substitution of German
activities/labour by Turkish ones is possible in this example. Indeed, the length of the
partnership (more than one year) suggests that.

         iv - Contact details for the Turkish Subcontracting and Partnership Exchange:

For further information on the Turkish Subcontracting and Partnership Exchange or on the
case studies, please contact:
Mr. Mustak Çaglar, SPX Manager
Address: Turkish Subcontracting Exchange - Turk Yan Sanayi Borsasi, Resadiye Caddesi,
34378 Eminônu, Istanbul, P.O. Box 377, Turkey
Tel: +9021 2455 6222
Fax: +9021 2513 8219
E-Mail: yansanayi@tr-ito.com or mustak.caglar@ito.org.tr

                H. Uruguay:

        i - The Bolsa de Subcontratación del Uruguay:

The Bolsa de Subcontratación del Uruguay started its activities in November 1991 and has
local Uruguayan subcontractors and suppliers originating from a variety of sectors in its
roster. The sectors that are represented are:

                    1)   Metal
                    2)   Mechanical
                    3)   Plastics
                    4)   Electrics
                    5)   Electronics
                    6)   Wood
                    7)   Agro-Industry

One international partnership was sent for the survey.




                                                                                             38
       ii - Case 14: Cementos Avellaneda S.A. (Argentina) and Imzama S.A.:

The example provided by the BSA del Uruguay consisted of a partnership involving a local
metal-mechanical subcontractor Imzama and an Argentinean civil construction enterprise,
Cementos Avellaneda S.A.. Two Spanish cement companies, Cementos Molins and
Cementos Uniland, European leaders in the field, in fact jointly and equally own Cementos
Avellaneda S.A..

The SPX responded to a demand by the civil construction company requesting it to find a
subcontractor capable of providing metallic structures. Imzama was eventually chosen to
conduct the activity. The agreement/project lasted for a full year and helped the subcontractor
create one additional job opportunity. No information was submitted concerning the value of
the contract.

The respondent explained that the fabrication of metallic structures was an activity that
existed in Argentina when it was needed by Cementos Avellaneda S.A. thereby leading us to
suggest that there could have been a substitution of activities between both nations. However,
we could not identify whether the Argentinean contractor did so because no spare capacity
was available in Argentina or for strategic reasons. Furthermore, the metallic structures were
eventually sent back to Argentina for additional processing and assembly.

Finally, the contractor gained significantly from the partnership. It was able to increase its
competitiveness thanks to the lower costs of production in metallic structures available
through the Uruguayan subcontractor. In addition, the partnership also helped Cementos
Avellaneda S.A. increase its market share. Indeed, after opening a new cement production
plant, one of the largest and most modern in South America, Cementos Avellaneda S.A. was
able to increase its participation not only in Argentina but also in Uruguay by networking
with the Uruguayan subcontractor. Moreover, by subcontracting the fabrication of metallic
structures to Imzama, the partnership helped Cementos Avellaneda S.A. concentrate on its
core civil construction (concrete and masonry) skills. As a result, Cementos Avellaneda S.A.
was able to create additional job opportunities which consisted of a new industrial company
that employs on average 100 direct workers.

         iii - Contact details for the Bolsa de Subcontratación del Uruguay:

For further information on the Bolsa de Subcontratación del Uruguay or on the case studies,
please contact:
Mr. Fernando Carpentieri, SPX Manager
Address: Bolsa de Subcontratación del Uruguay, Av. Italia 6101, Primer Piso, C.P. 11500,
Montevideo, Uruguay
Tel: +5982 9023 402 or +5982 9015 000
Fax: +5982 9012 753
E-Mail: fcarpen@ciu.com.uy




                                                                                            39
        3) Summary of results:

In total, 14 examples of international subcontracting partnerships were presented in the
survey. Eight of them involved partnerships with main contractors from developed countries
and another six involved main contractors from developing countries. We have categorised
the findings in tables 3 and 4 in order to highlight the key similarities and differences between
both types of partnerships.

                 A. Partnerships with contractors from developed countries:

Table 3 presents the information for partnerships involving main contractors from developed
countries. The partnerships consisted either of American enterprises (three cases) or of
European-based enterprises (five cases).

As our survey indicated earlier, these partnerships were beneficial - “win-win” - for both the
(developing country) subcontractors and the (developed country) main contractors. In the case
of subcontractors, the benefits consisted of the following: 1) job creation (either internally or
externally through local subcontracting networks), 2) job preservation (as opposed to job
creation whereby jobs are not created but maintained), 3) increased revenues, 4) technology
improvements/upgrading, 5) adding international clients to the customer base and 6)
international clients acting as an additional source of orders (project generation).

In the case of main contractors, the benefits consisted of the following: 1) job creation
(creation of new service lines, concentration on core and high-skill activities), 2) cost
reductions, 3) improved competitiveness, 4) increased market share (maintaining market
leadership, access into new markets, new product entry into market), 5) access to raw
materials, 6) acquisition of high quality components/parts (technological improvements) and
7) enhanced value of the final product.

Furthermore, these partnerships also illustrate how developed and developing countries have
complementary productive activities. Indeed, in five cases out of the eight partnerships, the
subcontracted product requested by the main contractor was not available in the home nation.
We should note, nevertheless, that in two cases the product was reported as existing in the
home nation of the main contractor. The short-term nature of the partnerships in these two
cases (one year), however, led us to argue that the reason for not using subcontractors at home
was a lack of spare capacity, although no information was submitted to confirm this. For the
remaining three partnerships, in one case, no information was available as to the existence of
the subcontracted product in the home nation of the main contractor. In the final two, the
product was reported as existing.

Finally, in six cases out of the eight partnerships, the subcontracted product was returned to
the home nation of the main contractor for further processing/assembling. In fact, in one of
the remaining two partnerships, the nature of the subcontracted product prevents this
possibility. Since the subcontracted products represented the final stage in the supply chain,
when it was returned to the home nation of the main contractor, it did not undergo further
processing or assembling.

Overall, therefore, the main conclusion that stems from these partnerships is that in the
majority of cases, the productive activities of subcontractors from developing countries and
those of contractors from developed countries complement each other rather than substitute
for each other. This finding is very much in line with the evidence we outlined in section IV
where we explained that countries at different levels of development complement each other.
Driven by the natural competitive advantages of nations and underpinning an international
division of labour, countries at different levels of development complement each other.
Hence, these partnerships illustrate the following statement: “not only do the subcontractors


                                                                                              40
 from developing countries and the contractors from developed countries benefit from
 international subcontracting partnerships but so do their respective nations. Complementary-
 based subcontracting partnerships are a win-win situation for the North as well as the South”.

 Table 3: Summary of Findings for Partnerships Involving a Developed-Country Main
 Contractor.
Case study     Benefits generated     Benefits generated     Existence of the      When        the
number and     for            the     for    the   main      product supplied      subcontracted
country of     subcontractor as a     contractor as a        or         service    product     was
origin    of   result    of   the     result    of   the     provided in the       returned to the
main           partnership:           partnership:           home nation of the    home nation of
contractor:                                                  main contractor:      the contractor
                                                                                   did it undergo
                                                                                   further
                                                                                   processing or
                                                                                   assembling:
Case 1 -       1. 50 teams of         1. Cost reduction      NO                    NO
USA            employees              2. Technological
               preserved              improvements
               2. Job creation -      3. Improved
               ten and other          competitiveness
               second and third       following 1 and 2
               tier party jobs        4. Possible
               3. Increased           increase in market
               revenue of             share
               100,000 US$ per
               year over a five-
               year period
Case 2 -       1. One project         1. Facilitated         NO                    YES
USA            (contract)             access to raw
               2. Adding one          materials
               major                  2. Improved
               international client   competitiveness
               to customer base       following 1
               3. Employment          3. Entry into new
               preservation           market niche
                                      4. New service
                                      line created
                                      5. Job creation -
                                      40 in USA
Case 8 -       1. Six projects        1. Cost reduction      NO                    YES
USA            (contracts)            2. Facilitated final   Note: Despite the
               2. Market outlets      product access         subcontracted
               3. Employment          into the market        product’s
               preservation           3. Improved            availability in the
                                      competitiveness        USA, the short-
                                      following 1 and 2      term nature (one
                                      4. Increased           year) of the
                                      market share           partnership
                                      5. Job creation -      suggests that there
                                      60 (concentration      was a lack of spare
                                      on high-skill          capacity in the
                                      activities)            USA to undertake
                                                             the required tasks.



                                                                                               41
Case 9 -      1. Nine projects      1. Acquisition of     NO                    YES
France        (contracts)           high quality          Note: Despite the
              2. Market outlets     components            subcontracted
              3. Employment         2. Enhanced value     product’s
              preservation          of final product      availability in
                                    3. Improved           France, the short-
                                    competitiveness       term nature (one
                                    following 1 and 2     year) of the
                                    4. Market             partnership
                                    leadership            suggests that there
                                    maintained            was a lack of spare
                                    5. Job creation -     capacity in France
                                    40 (concentration     to undertake the
                                    on high-skill         required tasks.
                                    activities)
Case 10 -     1. Increased          1. Cost reduction     Not known             YES
Netherlands   revenue of 7300       2. Improved
              euros                 competitiveness
Case 11 -     1. Increased          1. Cost reduction     NO                    YES
Germany       revenue of US$        2. Introduction of
              1000                  new product into
              2. Job creation -     the market at a
              internally as well    competitive price
              as externally         3. Improved
              through networks      competitiveness
              of second and         following 1 and 2
              third tier firms
Case 12 -     1. Job creation -     Not available         YES                   YES
UK            six
              2. Increased
              revenue - 351,000
              euros per year
              over a two-year
              period
Case 13 -     1. Job creation -     Not available         YES                   NO
Germany       seven                                                             Note: The
              2. Increased                                                      subcontracted
              revenue of                                                        product
              250,000 Euros                                                     represented the
              over a two-year                                                   final stage of
              period                                                            the supply
                                                                                chain.

                 B. Partnerships with contractors from developing countries:

 Table 4 presents the information for partnerships involving main contractors from developing
 countries. The partnerships involved either Asian enterprises (three cases) or South-American
 enterprises (three cases).

 The partnerships were also beneficial for both the subcontractors as well as the main
 contractors. In the case of the subcontractors, the benefits consisted of the following: 1) job
 creation (either internally or externally through local subcontracting networks), 2) job
 preservation (as opposed to job creation whereby jobs are not created but maintained), 3)
 increased revenues, 4) spare capacity reduction and 5) technology improvements/upgrading.


                                                                                             42
 In the case of main contractors, the benefits consisted of the following: 1) job creation
 (concentration on core activities), 2) cost reductions, 3) improved business efficiency, 4)
 improved competitiveness, 5) increased/maintained market share (maintaining market
 leadership) and 6) access to high quality components/parts.

 Moreover, as the studies we mentioned earlier suggested, the substitution of activities
 between nations occurs with countries at similar levels of development. Indeed, in all the
 cases mentioned, the subcontracted product was reported as existing in the home country of
 the main contractor. Furthermore, in only three out of the six partnership cases, the
 subcontracted product was sent back to the home country of the main contractor for further
 processing/assembling as part of the supply chain.

 Overall, the main conclusion stemming from these partnerships is that the productive
 activities of subcontractors and contractors from developing countries seem to substitute for
 each other. This finding is again in line with the evidence we put forward in section IV,
 namely that the substitution of activities is a phenomenon that takes place with countries at
 similar levels of development, notably between developing countries.

 Table 4: Summary of Findings for Partnerships Involving a Developing-Country Main
 Contractor.
Case study     Benefits generated   Benefits generated   Existence of the     When         the
number and     for            the   for    the   main    product supplied     subcontracted
country of     subcontractor as a   contractor as a      or         service   product     was
origin    of   result    of   the   result    of   the   provided in the      returned to the
main           partnership:         partnership:         home nation of       home nation of
contractor:                                              the          main    the contractor
                                                         contractor:          did it undergo
                                                                              further
                                                                              processing    or
                                                                              assembling:
Case 3 -       1. Job creation -    1. Cost reduction    YES                  YES
China          15                   2. Improved
               2. Increased         business
               revenue of 0.1       efficiency
               million Indian       3. Improved
               Rupees               competitiveness
                                    following 1 and 2
                                    4. Growth in
                                    market share
Case 4 -       1. Job creation –    1. Cost reduction    YES                  NO
China          five                 2. Access to high
               2. Increased         quality materials
               revenue of 0.2       3. Improved
               million Indian       competitiveness
               Rupees               following 1 and 2
                                    4. Increase in
                                    market share
Case 5 -       1. Job creation -    1. Cost reduction    YES                  NO
Singapore      four                 2. Access to good
               2. Increased         quality laminates
               revenue of           3. Improved
               160,000 Indian       competitiveness
               Rupees               following 1 and 2



                                                                                           43
                                  4. Maintaining
                                  market leadership
                                  (maintaining
                                  market share)
                                  5. Job creation -
                                  marketing/sales
Case 6 -    1. Job creation -     1. Reduction in      NO              NO
Paraguay    three                 logistical costs     Note: Product   Note: Not
            2. Increased                               originally      possible
            revenue of US$                             imported from
            15,000                                     Argentina.
            3. Reduced spare
            capacity
Case 7 -    1. Use of two-        1. Cost reductions   YES             YES
Brazil      small scale second    2. Improved
            tier suppliers with   competitiveness
            average of 30         following 1
            employees             3. Increased
            2. Increased          market share
            revenue of US$
            50,000 per project
Case 14 -   1. Job creation -     1. Cost reductions   YES             YES
Argentina   one                   2. Improved
                                  competitiveness
                                  3. Increased
                                  market share
                                  4. Job creation
                                  (concentration on
                                  core activities)




                                                                                   44
VI. CONCLUSION:
The practice of industrial subcontracting at an international level has spread substantially
since the early 1970s. In an ever more competitive environment, the global economy presents
a number of opportunities for firms to take advantage of geographically dispersed productive
activities.

Today, one of UNIDO’s aims is to provide a platform for development, job creation,
productivity-enhancement, export-promotion and import-substitution through subcontracting
partnerships established either at the national or international level. Since 1982, UNIDO has
been promoting the concept of “industrial partnerships” which refers to long-lasting and
equitable industrial subcontracting relationships based upon the specialization and
technological expertise of subcontractors or suppliers. The complementarity of the assets and
technologies between the parties involved can thus form the basis for the establishment of
vertical type relationships with a long-term sharing of responsibilities.

The main institutional mechanism used by UNIDO to achieve these development targets and
to facilitate the international redeployment of manufacturing facilities is to set-up
Subcontracting and Partnership Exchanges (SPXs). These exchanges are designed to build up
technical information systems and networking potentials, so as to facilitate production
linkages between small, medium and large manufacturing firms. They act as matchmaking
and technical centres for industrial subcontracting partnerships between supply and demand.
Since 1982, UNIDO has established a network of no less than 65 Subcontracting and
Partnership Exchanges and more than 100 associate members across the globe.

We have seen in this paper how complementary-based industrial subcontracting partnerships
between subcontractors from developing countries and contractors from developed countries
are indeed very effective tools to achieve higher levels of competitiveness for both partners.
They represent a “win-win” situation for the North and the South. Subcontractors improve
their productivity and efficiency, create jobs, reduce their spare capacity, develop economies
of scale and benefit from technology transfers. Main contractors from developed countries
improve their competitiveness by reducing their production costs; by having access to high
quality components, parts, sub-assemblies or industrial services and by penetrating markets
with commercial opportunities. In turn, this enables them to increase their efficiency and to
have spare resources available that could be used to generate new employment opportunities.
In these types of partnerships, developed countries main contractors not only maintain their
productive activities and thereby save jobs but also increase their competitiveness and hence
their market share and thereby create new jobs.

Nevertheless, despite these market-driven advantages, many concerns have been expressed
about the implications of subcontracting stemming from developed countries and targeted at
developing countries. It has been argued that firms have delocalised and have therefore been
the cause for labour market changes within many developed countries in the 1980s and 1990s.
Delocalisation represents an economic phenomenon entailing a geographical transfer of
productive activities, as a result essentially of a more advantageous cost price. A full
empirical definition of delocalisation encompasses the subcontracting activities of developed-
country firms outside their domestic markets and the partial/entire geographical movement of
their production processes to foreign countries through foreign direct investments.

We have tried in this paper to determine whether or not the view that international
subcontracting into developing countries is a cause for labour market changes in developed
countries is justified. Bearing in mind the above-mentioned definition of delocalisation we
adopted, we made a number of interesting conclusions.




                                                                                           45
Firstly, in terms of the labour market effects of international subcontracting into developing
countries we have shown that the evidence is split into two groups. On the one hand, most
economists argue that international trade with developing countries (including international
subcontracting) is too small to account for labour market changes in developed countries. The
cause is instead attributed to domestic factors such as technological change. On the other
hand, a few researchers led by economists Feenstra and Hanson, argue that international
subcontracting has the same effect as technological change and therefore contributes to labour
market changes. In fact, they argue that both technological change and international
subcontracting negatively affect the unskilled portion of the labour force in developed
countries. Our main argument is that in fact this is a natural economic phenomenon driven by
the competitiveness of nations in a globally integrated economy where both developed and
developing nations use more intensively those factors of production in which they are better
endowed.

Secondly, we have demonstrated through a summary of academic studies (mostly based on
US multinationals) that FDI into developing countries acts as a complement to the labour
force of developed countries. Moreover, we have seen that the substitution of productive
activities is a phenomenon that occurs with countries at similar levels of development, i.e.
between labour forces of developing countries or between labour forces of developed
countries.

Furthermore, in line with the second objective of this survey, we have illustrated the latter
evidence in the context of UNIDO activities by using a total of 14 international partnerships
fostered through the SPX network set up by UNIDO. All partnerships involved a
subcontractor from a developing country and an international main contractor. In eight cases,
the main contractor originated from developed countries (either the USA or the EU) and in
the remaining six, the main contractor was of developing country origin.

In all cases, the partnership proved to be beneficial or “win-win” for both the subcontractors
and the main contractors, whether the latter were from developing countries or developed
countries. The benefits that were generated for the subcontractors consisted of the following:
1) job creation (either internally or externally through local subcontracting networks), 2) job
preservation (as opposed to job creation whereby jobs are not created but maintained), 3)
increased revenues, 4) technology improvements/upgrading, 5) adding international clients to
the customer base thereby acting as an additional source of orders (project generation) and 6)
spare capacity reduction. In the case of main contractors, the benefits consisted of the
following: 1) job creation (creation of new service lines, concentration on core and high-skill
activities), 2) cost reductions, 3) improved competitiveness, 4) improved business efficiency,
5) increased/maintained market share (maintaining market leadership, entry into new market
niches, new product entry into market), 6) access to raw materials, 7) acquisition of/access to
high quality components/parts (technological improvements) and 8) enhanced value of the
final product.

Moreover, through these partnerships we have demonstrated two facts. Firstly, we have
shown in the context of North-South subcontracting partnerships that the productive activities
of subcontractors from developing countries and those of contractors from developed
countries complement each other rather than substitute for each other. Indeed, in 62.5 percent
of cases (in fives cases out of the eight partnerships involving developed country contractors),
the subcontracted product was not available in the home nation of the main contractor. In
addition, in 75 percent of cases (in six cases out of the eight partnerships involving developed
country contractors), the product was returned to the home nation of the main contractor for
further processing or assembling. In fact, in the remaining 25 percent of cases, the nature of
the subcontracted product prevented the possibility of it undergoing further
processing/assembling. Thus, these partnerships demonstrate the philosophy that UNIDO has



                                                                                             46
adopted and follows: promoting complementary-based “win-win” industrial partnerships
between developed and developing country partners through its SPX network.

Secondly, in the context of South-South industrial subcontracting partnerships, we have
demonstrated that the substitution of activities between nations occurs with countries at
similar levels of development. Indeed, in all the cases mentioned, the subcontracted product
was reported as existing in the home country of the main contractor. Furthermore, in only 50
percent of cases (in three cases out of the six partnerships involving developing country
contractors), the subcontracted product was returned to the home nation of the main
contractor for further processing/assembling.

 Therefore, the findings ensuing from the international partnerships involving developed
 country contractors and developing country subcontractors have shown that contrary to
 delocalisation, international subcontracting is beneficial for the South as well as for
 the North. In other words, in the context of UNIDO and as echoed by a number of
 academic studies, there is enough evidence to suggest that international subcontracting in
 developing countries should not be seen as a primary cause for labour market changes in
 developed countries. In contrast, driven by the natural competitive advantages of nations
 and underpinning an international division of labour, countries at different levels of
 development complement each other.




                                                                                          47
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www.unido.org/spx




                                                                                             49
APPENDIX:




   Appendix 1: English Cover Letter
   Appendix 2: English Questionnaire




                                       50
UNITED NATIONS INDUSTRIAL DEVELOPMENT ORGANIZATION
VIENNA INTERNATIONAL CENTRE
P.O. BOX 300, A-1400 VIENNA, AUSTRIA
TELEPHONE: (+43 1) 260 26-0              FAX: (+43 1) 269 26 69        www.unido.org             unido@unido.org




Dear Sir or Madam,

Subject: Subcontracting versus Delocalisation Survey

I am an intern working with André de Crombrugghe who has requested me to contact you for the following
purpose.

Over the past few years and as demonstrated by our growing network of SPX members (55) and associate
members (more than 100), subcontracting has become an increasingly useful tool for the industrial development of
developing countries. By concentrating on small and medium sized suppliers within the latter countries, it
stimulates a whole process of linkages within different industrial sectors.

Nevertheless, despite these benefits, some doubts have been expressed about the positive impact that
subcontracting could have in developing nations. Indeed, it has been suggested that subcontracting into developing
countries could be the direct cause of job losses within parallel industries in Europe, Japan and the US. In other
words, subcontracting would be the equivalent to delocalisation, or the closing down major industrial sites. It is
particularly important for us to demonstrate that subcontracting is usually a win-win situation between the
industrialized and developing countries / partners, contrary to delocalisation of plants, even more so since it is
some of the industrialized countries that are actually funding our industrial assistance projects.

In order to counter this problem and build upon some of our earlier work, the Industrial Subcontracting and
Supply Chain Management team of UNIDO has decided to conduct a survey on this matter. The survey will firstly
aim to show the way in which subcontracting part of a company’s supply chain into developing countries does not
necessarily lead to job losses in the home nation. On the contrary, it can help the main company located in an
industrialized country to survive and even to expand and gain new market shares as it becomes more competitive.

Secondly, we hope to able to use a number of case studies that will act as illustrations. For this purpose, we shall
use as our foundation for the study some of the most successful SPXs in our network. We would therefore like to
invite you to fill in the attached questionnaire. Upon completion of the study, we shall use it as a tool to promote
subcontracting that we shall then forward on to you.

In the hope of hearing from you soon, I remain



                                                              Yours Sincerely

                                                         Jean-Louis Morcos, Intern
                                   Industrial Subcontracting and Supply Chain Management Programme
                                         Industrial Investment and Technology Promotion Branch
UNITED NATIONS INDUSTRIAL DEVELOPMENT ORGANIZATION
 SUBCONTRACTING VERSUS DELOCALISATION SURVEY - QUESTIONNAIRE
    1. Background information:

Name of the SPX:
Name of person(s) who completed the
questionnaire:
Date of establishment of the SPX:

    2. General information on the SPX:

Which industrial sectors are represented in the SPX:


Scope of partnerships:                                  At the local level                        %
                                                        At the national level                     %
                                                        At the international level                %

    3. International partnerships:

In the following section, we would like you to select 2 to 4 partnerships between a local
subcontractor/supplier registered in your SPX database and an international contractor. It would be
preferable if you could use examples from the electrical, electronics, chemical, metal, mechanical or,
plastics sectors.

    Example 1:

Industrial sector of the contractor and name:
Industrial sector of the subcontractor/supplier and name:
Type of product produced by the subcontractor/supplier:
Did the product exist in the home country of the
contractor:
Is the product sent back to the home country as part of
the supply chain for more processing or assembling:
Length of the partnership between the
subcontractor/supplier and the contractor:
Number of jobs created for the subcontractor/supplier as
a result of the partnership:
Revenue generated for the subcontractor/supplier as a
result of the partnership:
Information which shows how the subcontractor by
networking back to the contractor’s home nation has
created more jobs there:
Contact details of the contractor:
Benefits generated for the main contractor in the
industrialised country in terms of competitiveness:
Benefits generated for the main contractor in the
industrialised country in terms of market share:
Benefits generated for the main contractor in the
industrialised country in terms of job creation:
                                                                                                      1
    Example 2:

Industrial sector of the contractor and name:
Industrial sector of the subcontractor/supplier and
name:
Type of product produced by the
subcontractor/supplier:
Did the product exist in the home country of the
contractor:
Is the product sent back to the home country as part of
the supply chain for more processing or assembling:
Length of the partnership between the
subcontractor/supplier and the contractor:
Number of jobs created for the subcontractor/supplier
as a result of the partnership:
Revenue generated for the subcontractor/supplier as a
result of the partnership:
Information which shows how the subcontractor by
networking back to the contractor’s home nation has
created more jobs there:
Contact details of the contractor:
Benefits generated for the main contractor in the
industrialised country in terms of competitiveness:
Benefits generated for the main contractor in the
industrialised country in terms of market share:
Benefits generated for the main contractor in the
industrialised country in terms of job creation:

    Example 3:

Industrial sector of the contractor and name:
Industrial sector of the subcontractor/supplier and name:
Type of product produced by the subcontractor/supplier:
Did the product exist in the home country of the
contractor:
Is the product sent back to the home country as part of
the supply chain for more processing or assembling:
Length of the partnership between the
subcontractor/supplier and the contractor:
Number of jobs created for the subcontractor/supplier as
a result of the partnership:
Revenue generated for the subcontractor/supplier as a
result of the partnership:
Information which shows how the subcontractor by
networking back to the contractor’s home nation has
created more jobs there:
Contact details of the contractor:
Benefits generated for the main contractor in the
industrialised country in terms of competitiveness:
Benefits generated for the main contractor in the
industrialised country in terms of market share:
Benefits generated for the main contractor in the
industrialised country in terms of job creation:


                                                            2
    Example 4:

Industrial sector of the contractor and name:
Industrial sector of the subcontractor/supplier and name:
Type of product produced by the subcontractor/supplier:
Did the product exist in the home country of the
contractor:
Is the product sent back to the home country as part of
the supply chain for more processing or assembling:
Length of the partnership between the
subcontractor/supplier and the contractor:
Number of jobs created for the subcontractor/supplier as
a result of the partnership:
Revenue generated for the subcontractor/supplier as a
result of the partnership:
Information which shows how the subcontractor by
networking back to the contractor’s home nation has
created more jobs there:
Contact details of the contractor:
Benefits generated for the main contractor in the
industrialised country in terms of competitiveness:
Benefits generated for the main contractor in the
industrialised country in terms of market share:
Benefits generated for the main contractor in the
industrialised country in terms of job creation:

The Industrial Subcontracting and Supply Chain Management Programme team would like to thank you for
the time and effort you have put into completing this questionnaire.




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